Fred L. Fry, Charles Stoner, Laurence Weinzimmer - Strategic Planning For New & Emerging Businesses - A Consulting Approach (1999, Kaplan Business)

title : Strategic Planning for New & Emerging Businesses : A Consulting Approach
author : Fry, Fred L.; Stoner, Charles R.; Weinzimmer, Laurence G.

publisher : Kaplan Publishing
isbn10 | asin : 1574101145
print isbn13 : 9781574101140
ebook isbn13 : 9780585318790
language : English
subject Small business--Management, New business enterprises--Management,
Small business--Planning, Strategic planning.
publication date : 1999
lcc : HD62.7.F79 1999eb
ddc : 658.4/012
subject : Small business--Management, New business enterprises--Management,
Small business--Planning, Strategic planning.
cover
Page i
Strategic Planning for New & Emerging Businesses
A Consulting Approach
Second Edition
Fred L. Fry
Charles R. Stoner
Laurence G. Weinzimmer
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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with
the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other
expert assistance is required, the services of a competent professional should be sought.
Editorial Director: Cynthia Zigmund

Acquisitions Editor: Robin
Nominelli
Managing Editor: Jack Kiburz
Project Editor: Trey Thoelcke
Cover Design: Rattray Design
Typesetting: the dotted i
© 1999 by Dearborn Financial Publishing, Inc.®
Published by Upstart Publishing

Company®
a Kaplan Professional Company
All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written
permission from the publisher.
Printed in the United States of America
99 00 01 10 9 8 7 6 5 4 3 2 1
Library of Congress Cataloging-in-Publication Data

Fry, Fred L.
Strategic planning for new & emerging businesses : a consulting approach /
Fred L. Fry, Charles R. Stoner, Laurence G. Weinzimmer.
p. cm.
Rev. ed. of: Strategic planning for the new and small business. c1995.
Includes bibliographical references and index.
ISBN 1-57410-114-5 (pbk.)
1. Small businessManagement. 2. New business enterprisesManagement.
3. Small businessPlanning. 4. Strategic planning. I. Stoner, Charles R.
II. Weinzimmer, Laurence G. III. Fry, Fred L. Strategic planning for new
& emerging businesses. IV. Title.
HD62.7.F79 1999
658.4'012dc21 98-48418
CIP
Upstart books are available at special quantity discounts to use as premiums and sales promotions, or for use in training programs. For
more information, please call Upstart at 800-621-9621, ext. 4529, or write to Dearborn Financial Publishing, Inc., 155 North Wacker Drive,
Chicago, IL 60606-1719.
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Contents
List of Figures vii
Preface ix
Chapter 1 1
The Nature of Strategic Planning
3
The Need for Planning
6
Barriers to Planning
8
The Benefits of Strategic Planning
11
The Strategic Planning Process
14
The Strategic Planning Model
18
The Consultant's Viewpoint
Chapter 2 21
Managing the Consulting Process
23
The Nature of Consulting
25
The Phases of the Consulting Process
Chapter 3 35
Providing Direction for Growth and Change
36
A Focus on Growth and Change
43
Setting a Direction for Growth and Change
49
Chapter 4 53
Environmental AnalysisGeneral Environment
54
The Value of Environmental Analysis
55
Proactive Management
55
The Nature of Environmental Analysis
58
Analyzing the General Environment
65
Chapter 5 69
Environmental AnalysisIndustry Environment
70
Nature of the Industry
70
Industry Growth Rate
72
Competitive Rivalry
76
Characteristics of Customers
80
Suppliers
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Page iv
81
Performing an Environmental Analysis
84
Chapter 6 91
Internal Analysis
92
Value of Internal Analysis
92
Elements of Internal Analysis
97
Financial Resource Analysis
110
Evaluating Marketing Resources
120
Evaluating Operational Resources
123
Evaluating Human Resources
126
Chapter 7 129
Recognizing Distinctive Competencies and Competitive Weaknesses
130
Environmental Opportunities versus Relevant Business Opportunities
131
The Role of Distinctive Competencies
131
Identifying and Developing Areas of Distinctive Competence
137
Relating Distinctive Competencies to Relevant Business Opportunities
138
Sustainable Competencies
139
Distinctive Competencies and Strategic Planning
141
Competitive Weaknesses
142
Chapter 8 145
Growth Strategies for New and Emerging Businesses
147
Focus Strategies
148
Market Development Strategies
154
Product Development Strategies
155
Diversification Strategies
157
Selecting an Appropriate Growth Strategy
159
Chapter 9 161
Setting Goals
162
Benefits of Specific Goals
162
Characteristics of Good Goals
164
How Are Goals Created?
165
Levels and Time Frames
169
The Goal Segmentation Process
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170
Target Action Plans
175
Chapter 10 179
Developing Unit Strategies
181
Marketing Strategy
187
Operations Strategy
190
Human Resources Strategy
192
Financial Strategy
198
Chapter 11 201
Writing the Plan
202
Why Write the Plan?
202
The Strategic Plan Format
212
Sharing the Plan
213
214
A Final Comment
Appendix: Sample Strategic Plan 217
Glossary 225
Index 233
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List of Figures
Figure 1.1 15
Strategic Planning Model
Figure 1.2 17
Strategic Plan Format
Figure 2.1 31
Outline of the Final Written Report
Figure 3.1 49
Joy's Toy Company Mission Statement
Figure 3.2 50
Sample Mission Statements
Figure 4.1 57
Environmental Analysis
Figure 5.1 71
Stages in a Product Life Cycle
Figure 5.2 77
Competitive Analysis Profile
Figure 5.3 85
Environmental Data Sources
Figure 5.4 87
Guides to Environmental Brainstorming
Figure 5.5 89
Sources of Environmental Information
Figure 6.1 96
Internal Analysis Profile
Figure 6.2 99
Waverly Custom Jewelers Comparative Balance Sheets
Figure 6.3 100

Waverly Custom Jewelers Comparative Income Statements
Figure 6.4 101

Comparative Balance Sheet Percentages (Vertical Analysis)
Figure 6.5 102

Comparative Income Statement Percentages (Vertical Analysis)
Figure 6.6 103

Waverly Custom Jewelers Cash Flow Statement 1998
Figure 6.7 105

Selected Financial Ratios for Waverly Jewelers
Figure 6.8 115

Location Factors for Retail Businesses
Figure 6.9 115

Location Factors for Manufacturing Businesses
Figure 7.1 136

Areas of Distinctive Competence Commonly Recognized by Emerging Small Businesses
Figure 7.2 141
Distinctive Competency Identification Process
Figure 8.1 146

Topology of Growth Strategies
Figure 9.1 166

Levels of Small-Business Goals
Figure 9.2 167

Examples of Company and Unit-Level Goals
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Figure 9.3 168

Goal Time Frames
Figure 9.4 170

Levels and Time Frames of Goals
Figure 9.5 171

Target Action Plan
Figure 9.6 172

Target Action Plan for Uplands Supply, Inc.
Figure 9.7 175

Integrative Goal Model
Figure 10.1 180

Relationship between Goals and Strategies
Figure 11.1 204

List of Profiles
Profile 4.1 56
Peapod, Inc.
Profile 5.1 73
New Balance Athletic Shoe, Inc.
Profile 5.2 78
Harley's Hardware
Profile 6.1 93
Giving Up Your Best Customer
Profile 6.2 94
Osborne Computer Corporation
Profile 6.3 113

Kultur International Films, Ltd.
Profile 7.1 132

Amazon.com
Profile 7.2 133

Courtland Clubs
Profile 7.3 135

Cybercafes: Coffee, Computers, and Comaraderie
Profile 7.4 140
Columbia Sportswear Forges Ahead in Battle against Trademark Infringers
Profile 8.1 149

The Blue Ribbon Car Wash
Profile 8.2 151

Crystal Rug Cleaners
Profile 8.3 153

ModaCAD, Inc.
Profile 10.1 186

Antiques Unlimited
Profile 10.2 193

Organic Online: The Company Is the People
Profile 10.3 196

Wilderness Sports: Growing through an IPO
Profile 11.1 203

Reder Electronics
Profile 11.2 209

Joy's Toys Company
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Page ix
Preface
Strategic Planning for New and Emerging Businesses: A Consulting Approach incorporates significant changes to the first edition, Strategic
Planning for the New and Small Business, which was published in 1995. The first change is the updating of material and examples to better
reflect businesses in the late 1990s and into the new millenium; many examples are current and highlight the needs of new and emerging
businesses.
The second, and more important, change is a slight redirection of the book's major thrust. This edition, while continuing an emphasis on new and
small businesses, recognizes the unique significance of emerging businessesfirms that are either in a growth mode or in the process of gearing up
for growth. They represent key forces in our society. Strategic planning, while important for all businesses, is of singular importance for
emerging businesses. We continue to emphasize the need for planning in new businesses, which face so many uncertainties that planning is
critical. Start-up entrepreneurs are often so intent on the activities required to launch their venture that they simply don't want to spend the time
looking at long-range implications. Yet understanding and utilizing a workable strategic plan can spell the difference between success and failure.
A third change in this edition is the inclusion of certain portions addressed specifically to consultants. Many readers are business managers, but a
large number are consultants. Some are professional consultants who work with emerging companies to enable their growth, and some
professionals are on the staff of Small Business Development Centers or similar organizations that are funded by state and federal sources to
work with small businesses. Other consultants are students working on class projects specifically targeted to small businesses. Some professional
consultants and students as well may be working with nonprofit organizations, which, despite lack of a profit motive, deal with many of the same
pressures that businesses do and craft strategies in much the same way.
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A final change in this updated edition is the addition of a third author, Laurence Weinzimmer. Dr. Weinzimmer is a colleague at Bradley
University and a recognized author and consultant in the area of strategy and, more specifically, growth in organizations.
Overall, we think you'll like the second edition of Strategic Planning for New and Emerging Businesses even better than the original.
Acknowledgments
We owe a debt of thanks to a number of people who were involved with the second edition. First, we'd like to thank David H. Bangs, Jr.,
Robert Brockhaus of St. Louis University, and "serial entrepreneur" Jerry Mitchell, president of the Midwest Entrepreneurs' Forum, for their
words of encouragement and support.
The reviewers, Ron Christy of Wichita State University, Armand Gilinsky of Sonoma State University, Kenneth Lacho of the University of
New Orleans, Charles Matthews of the University of Cincinnati, and Charlotta Nordyke of Strategic Edge Consulting, provided excellent
suggestions that were implemented in the final manuscript. A number of people graciously provided feedback on their course offerings to help
us prepare for the new edition. These people include the following:
R. K. Asundi, University of Puerto Rico-
Mayaguez
Jane Briere, University of West Florida
Michael Broida, Miami University (Ohio)
Martha Cobb, University of West Florida
Edward Cole, St. Mary's University
Bill Cunningham, Xavier University
Frank Hall, University of Arkansas-Little Rock
Cliff Hanson, Chadron State College
William Minnis, Indiana State University
George Puia, Indiana State University
Lowell Salter, University of North Florida
Gerald Segal, Florida Gulf Coast University
Matthew Sonfield, Hofstra University
Sherrie Taylor, Texas Women's University
Charles Toftoy, George Washington University
John Wallace, Marshall University
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Perhaps most important in the project was Robin Nominelli at Upstart Publishing Company, Inc. It was Robin who suggested to Upstart's
management that the book be revised and updated. And it was also Robin who suggested slightly redirecting the focus toward emerging
businesses. Last, we want to express our appreciation to our respective spousesLois, Julie, and Bethfor their support during this project.
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Page 1
Chapter 1
The Nature of Strategic Planning
This chapter sets the stage for strategic planning in new and emerging businesses. You will learn how small businesses are different from larger
ones and why emerging businesses are particularly significant. You will read why planning is important for all small businesses, and you will
understand why the planning process is especially critical in new and emerging businesses. You will be introduced to the planning model that
forms the basis for our entire book. In particular, when you have finished reading this chapter, you should
• be aware of the need for planning;
• be able to differentiate emerging businesses from other small businesses;
• be able to identify barriers to planning;
• understand what strategic planning is and why it is important for new and emerging businesses;
• realize the benefits of planning, especially for emerging businesses; and
• understand how the strategic planning model works.
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Perhaps no activity more fully symbolizes the American dream than owning a small business. Taking charge, exercising personal creativity and
independence, risking substantial personal funds, working long hours, and planning competitive business strategies are all part of the challenge
and excitement that lure one into the world of small business. But the dream of owning and operating a business can quickly turn into a
nightmare of devastating frustrations if the firm's performance lags behind original projections and expectations. Although there are millions of
small businesses in America today, successful growth-oriented small business ventures are the exception rather than the rule. Of the new small
businesses started each year, most will struggle and many will fail within the first five years. These crushed hopes and ravaged fortunes reflect
the effort of strong-willed persons who fought to build their fledgling operation into viable competitive entitiesand lost.
Just as we read the horror stories of those who failed, however, we also read of the major successes of others. Names like Bill Gates, Sam Walton,
J. A. Marriott, Michael Dell, and Walt Disney are examples of entrepreneurs who began businesses and grew them into mammoth organizations
whose influence is felt across the country and around the globe. Thus, the failure of many is offset by the wildly successful ventures of others.
In between these two extremes are millions of businesses in America that have provided a comfortable living for their owners. Many of
these businesses have remained small. At times, the decision to stay small is dictated by the competitive marketplace. There may be so many
similar firms or so many with dominant market strength that opportunities for meaningful growth are limited. At other times, the decision to
stay small is simply the entrepreneur's preference; the entrepreneur doesn't want to invest the time or resources to grow the business. This
decision, however, doesn't minimize the need for planning. The volatile nature of current markets makes planning critical.
Some businesses have seen substantial growth over time. In fact, thousands of businesses have made millionaires of their owners. These
businesses grew because the owners purposefully decided to invest the time and effort to help their business emerge from the quiet complacency of
a small business into the dynamic world of a growing concern. Growth means constant change, and change demands planning. It is for those
entrepreneurs who start new businesses and those owners who decide to grow their businesses that this book is written. Anyone who reads the
book will certainly benefit from it, but it is the owners of new and emerging businesses that are especially the focus of this book.
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The Need for Planning
Although small businesses encounter difficulties for numerous reasons, certain consistent themes persist. Some companies are victims of
unfortunate and largely unpredictable environmental and competitive occurrences. Some simply miss their market completely. However, the
vast majority of small firms fall prey to their managers' own lack of foresight. These managers don't properly analyze and evaluate their
relative competitive strengths. They fail because they are out of touch with their market and don't perceive shifting consumer tastes and
preferences. They fail because they lack a clear blueprint of necessary goals and support activities and therefore encounter costly
duplications, overlaps, and internal inefficiencies. In short, these managers fail because they are unable or unwilling to focus on one of the
prime determinants of business successstrategic planning.
Consider the following example. Bill Stern was an intelligent and industrious 28-year-old high school physics teacher. Bill felt particularly
restricted and unfulfilled as a teacher and yearned for greater freedom and independence. The logical choice: start his own business. Bill was
committed to working hard to make this career change a success. In exploring his entrepreneurial options, he was driven by a strong desire to do
hands-on work and not be confined to the rigors and frustrations of a teaching job. Because Bill loved and appreciated motorcycles and
motorcycle racing and was an accomplished motorcycle mechanic, he decided to open a motorcycle repair shop. Eighteen months later, after
exhausting the family's savings and enduring a regular regimen of 60-hour work weeks, Bill recognized that the business was doomed and filed
for bankruptcy.
Essentially, Bill's business decisions were spontaneous and unplanned. In the beginning, he reacted to a strong internal need for independent
activity without undertaking a meaningful analysis or evaluation of his business prospects. He failed to address important questions about the
actual demand for the proposed service. Bill relied on personal opinion and feeling and consequently was overly optimistic about the market
potential for his business. Further, no competitive analysis was performed. Although Bill knew the names of his major competitors, he had no feel
for the size of their business, the market niches they attempted to reach, or the degree of success they experienced. His repair shop was geared to
the hard-core, serious motorcyclist. Unfortunately, this was the same segment of the market that his two major competitorsin terms of size and
reputationhad also targeted.
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Careful planning and analysis would have revealed that another large segment of the marketthe weekend rider who didn't know much about
motorcyclesmight have been a more viable target for his business. Here, his major competition would have been dealers who generally had
reputations for poor service and high prices. Recognizing this niche and exploiting it through a well-planned advertising program might
have attracted numerous customers, although a careful analysis of the number of motorcycle riders in Bill's geographic area in relation to the
number of competing repair shops would likely have dissuaded him from moving into this high-risk, low-potential business in the first place.
Bill's story is only one of the many unfortunate examples of good intentions and hard work undermined by a lack of solid, systematic planning. A
number of research studies have demonstrated positive associations between planning and organizational performance; and inadequate planning is
regularly reported as one of the key causes or predictors of small business failure. 1 Stated simply, thorough and systematic planning can
significantly discriminate between successful and unsuccessful small businesses. Accordingly, the purpose of this book is to help owners and
managers of new and emerging businesses, students, and consultants develop a solid, logical, strategic approach to small business planning.
The New Business
Just as Bill Stern failed to plan adequately for his new business venture, many entrepreneurs fail to do the necessary homework before starting
a business. The new venture owner should at least consider the following items before launching a business.
First, potential entrepreneurs should perform a self-analysis to determine if they have ''the right stuff" to run a business. Many entrepreneurs, like
Bill Stern, start a business for the wrong reasons. Just because someone likes to cook doesn't mean they can run a restaurant. A person who is
quite adept at building Web sites, writing code, or designing networks may make a lousy owner of a computer consulting business. Thus,
potential entrepreneurs must assure themselves that they have the analytical ability, the organization skills, and the financial resources to make a
business go.
Second, the new business owner must consider the nature of the competition and the environment the business will face. A market that is too
small, like Bill's, will probably not succeed even if the competition is not fierce. If the business environment is riskier than usual or is domi-
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nated by larger firms, the new business will have an even tougher time succeeding. Accordingly, both the size of the market and its dynamics
must be studied carefully.
Third, the availability of resources is critical for new ventures. The potential entrepreneur must carefully consider whether sufficient
financial resources exist for both the start-up and later growth stages of the business. Most businesses that fail do so because of
insufficient capitalization. Similarly, the new owner must consider whether an adequate, skilled workforce is available, whether the right
technology is in use, and whether sufficient marketing skills exist to communicate with customers.
The Emerging Business
An emerging business is one that is growing or is poised for growth. The tasks facing owners and managers* of an emerging business who
are attempting to grow the business to new levels of performance are far different from the tasks necessary to simply operate a small business
at existing levels. Indeed, the culture in emerging businesses is different from that in traditional small businesses.
First, managers of emerging businesses must be proactive as they direct their thinking to the futureanticipating changes and making decisions
about what is likely to occur. They must think in terms of anticipated changes in the competitive environment. They must think in terms of
the financing necessary to reach new heights. They must think in terms of human and physical resources necessary to compete in the future.
They must consider product and service development that will meet customer needs in the future.
Second, the climate or ambience in an emerging business is different from that of traditional small businesses. In emerging businesses, growth is
the focus; it is the topic of conversation in meetings and the discussion at coffee breaks. Managers and other employees discuss competition, the
industry, and the economy as a matter of course.
Consider the following example of a company that moved from being a small business to being an emerging business. Gary Erickson and Lisa
Thomas owned a small business in Berkeley, California, called Kali's Sweets and Savories. It was a Greek-style bakery selling calzones and
* Because owners and managers in new and emerging businesses may often be the same person, we use the two terms interchangeably
throughout the text.
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cookies to coffee shops and groceries. On a cross-country bike ride, Erickson relied on PowerBars for nourishment. After overdosing on the
PowerBars, Erickson realized that they had the capacity at Kali's to produce similar bars from all-natural ingredients. Introducing its Clif
Bar, Kali's sells the cookielike bars as all-natural energy bars. Though Kali's is still small compared with the firm that makes PowerBars, it
did project 1997 sales of $22 million. 2
The difference between Kali's Sweets and Savories, the local Greek-style bakery, and Kali's Sport-Naturals Inc., the maker of Clif Bars, is one
of focus. Kali's had to change its focus from a local market to a broader market. It had to concentrate on the competition, on how to market the
bar, and generally on how to grow. In sum, it moved from being a small business to becoming an emerging business and is on the Inc. 500 list of
the fastest growing small businesses.
Barriers to Planning
Even though the planning process is generally considered to be valuable, many small business owners resist planning and don't feel the need
to involve themselves in the process. Although this resistance has numerous sources, a few are most prevalent. Four of the six such sources
of resistance discussed in the following sections are endemic to small businesses, while the fifth is unique to new businesses and the sixth is
more relevant for emerging businesses.
Barriers to Planning in Small Businesses
First, many small business owners contend that while planning may be important for large businesses, it is unnecessary for small businesses.
They insist, "I don't need to plan. That's something the big boys do." This notion is an extremely dangerous form of denial. In fact, planning may
be more critical for small businesses than for large ones. For example, the small business is likely to be seriously damaged by even minor market
or competitive misreadings. Large firms, on the other hand, can more readily absorb the costs of such mistakes. The small business is therefore
significantly more vulnerable to the consequences of poor planning.
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Second, some entrepreneurs suggest that because the small business is so short-term oriented, planning for the future is only a philosophical
exercise. But planning is necessary to take advantage of opportunities and defend against adverse changes and demands that exist whether the
firm's planning horizon is lengthy or compressed. The small business is no better able to isolate itself from these forces than is a large firm.
Third, many small business owners feel that formalized planning confines, constrains, and limits their firm's flexibility. Indeed, flexibility, or the
capacity to respond quickly and adapt to changing environmental conditions, may be the key competitive edge small businesses have over large
firms. However, the assertion that planning restricts this flexibility is based on a misunderstanding of the nature and dynamics of strategic
planning philosophy. Strategic plans are not unyielding parameters cast in stone, never to be adjusted, modified, or reviewed until the expiration
of the operating period to which they apply. Rather, the planning process is a means of gathering information, analyzing the impact of this
information on the firm, and refocusing efforts to meet new demands and conditions. As such, strategic planning offers the means to enhance
rather than limit the small firm's flexibility.
A fourth frequently held view is that intuitive, unwritten plans are sufficient. A typical small firm owner may say, "I have a plan all worked out
in my head, and that's good enough." Unfortunately, it usually isn't. A meaningful plan must analyze the complex interaction of numerous forces
and propose a guide for how the firm will deal with these forces. Given the pressures and demands of day-to-day operations, it's unreasonable to
believe that even the most insightful owner/manager can track, monitor, analyze, and develop strategies for dealing with these forces on a timely
basis without relying on some formal, written, systematic process. In short, it is extremely difficult for entrepreneurs to transfer what's in their
mind into sets of objective realities that guide their respective firms.
Barriers to Planning in New Businesses
Those starting new businesses are even more vulnerable than owners of existing businesses. A new venture suffers from a lack of history.
Existing businesses, of course, can rely on historical data as the prelude for forecasts and planning; the previous year's data becomes the baseline
for current or future years' forecasts. Unfortunately, the new business can't
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rely on history for help. In some cases, such as with the introduction of a totally new product or service, even industry data are not available.
Without question, one of the most difficult tasks in planning for new businesses is making an accurate forecast, and, ironically, there is probably
no situation in which planning is more important than in the case of a totally new venture selling a totally new product.
Barriers to Planning in Emerging Businesses
Although emerging businesses experience many of the barriers to planning noted above, they also encounter an additional barrier: lack of time.
As businesses start to grow, their owners and managers become increasingly stretched for time as they are forced to spend more and more of it
dealing with operational issues needed to keep up with growing demand. Thus, they don't have time for strategic planning. Frequently, they
are understaffed, and their employees work long hours just to keep up with the day-to-day demands. Accordingly, planning often goes by the
wayside. The planning issue for emerging businesses is so severe that one consultant attributed an estimated 95 percent of all failures in high-
growth businesses to internal problems. 3
The Benefits of Strategic Planning
It may be intuitively clear that increases in the level and quality of planning are associated with better overall business performance, but let's
examine in more detail some of the benefits of strategic planning.
The overriding benefit of strategic planning is best understood by realizing that it is a change-oriented process. New and small business owners
operate in a dynamic, volatile, and ever-changing environment. Their owners must sift through, understand, and appropriately respond to the
complex maze of rapid-fire changes they confront daily. Unless the owner senses the pace and direction of change, environmental shifts can
overwhelm a small business operation. Strategic planning encourages a careful and systematic reading of shifts in technology, competitor
position, and customer tastes. Further, the strategic planning process involves formulating actions to respond to these critical readings. As a
result, change becomes a driving force of evolving strength rather than a jarring threat to stability. Consider the following example.
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In an industry where similar-sized competitors have recently struggled or gone out of business at an alarming rate, Ross Marketing Services, Inc.,
has grown and prospered. To a large extent, that success stemmed from the company's recognition that its survival depended on strategically
addressing the change within its industry.
In business for 42 years, Ross has resisted the tendency of many small advertising agencies to maintain the traditional focus on the creative side
of advertising. Ross reasoned that because graphic arts were rapidly becoming computer driven, a limited creative focus would be increasingly
difficult to maintain competitively. Ross paid particular attention to changing customer needs and made the strategic commitment to transform
its business to be able to meet those needs more fully. As a result, Ross launched three new business units: Ross Training and Motivation (with
services such as events marketing and sales promotion and training); Ross Lead Management (with services such as database management and
lead generation programs); and Ross Custom Publishing (with services such as production art and technical writing).
These three new business areas, along with the core Ross Advertising, have enabled Ross to meet an array of customer demands and provide
services it previously subcontracted. The focus on change continues, and Ross Marketing Services, Inc., was recently named Small Business of
the Year by its local chamber of commerce. Demonstrating true strategic thinking, Ross's leaders reason that looking at new technology and
blending that technology to meet evolving customer needs will continue to be the formula for success.
Beyond the broad issue of change, strategic planning offers five specific benefits. First, strategic planning helps focus on the competitive nature
of the firm. Externally, the plan encourages the managers to look at the competition, the economy, the community, and other key
environmental factors to determine where the firm fits. Internally, the plan forces the managers to assess the firm's strengths and weaknesses.
Indeed, this analysis may reveal hidden vulnerabilities or unique strengths. As a result, necessary changes in strategy can be made. It is hoped
that initial planning efforts will foster the habit of periodically reassessing the firm's competitive position. In fact, the process of carefully
assessing the business and becoming aware of its potential and capacity may be even more significant than the plan that is eventually derived
from this analysis.
An example illustrates this point. A local businesswoman had been regularly counseled by a business consultant to develop a plan for her
growing operation. She was, of course, quite busy and never got around
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to it. One day the woman rather excitedly reported, "Guess what, I've started on my plan, even though I haven't finished. But one night while
working on it, I suddenly discovered a problem in the business that I corrected the very next day." Because this businesswoman had begun to
prepare a plan objectively, she uncovered a correctable weakness she had not seen before.
A second benefit is that a strategic plan sets a formal direction for the business. It helps determine where the business is going. In addition,
and perhaps as important, it helps determine where the firm is not going. Thus, a plan helps owners focus on specific objectives and stay there.
This planning orientation allows small business managers to work proactively, looking to the future and anticipating and planning for change.
Managers of proactive firms anticipate opportunities and position themselves to benefit from them. Similarly, these managers recognize
impending threats and take decisive action to deal with them before disaster strikes. Crisis management is replaced by a more fluid, logical,
and systematic approach. The firm's management understands and treats change as a competitive weapon rather than as an uncontrollable
nuisance to be ignored as long as economically and competitively possible.
The following example highlights the importance of competitive awareness and focus. An extremely enterprising young man possessed classic
entrepreneurial flair. He was involved in three different business ventures and personally headed a firm that operated in such diverse areas as
insurance, real estate, and managerial consulting. Not surprisingly, he was experiencing problems in nearly all phases of his businesses. One
might logically assume that the underlying cause of his difficulties was his attempt to do too muchspreading himself too thin. Although he was
spreading himself thin, his difficulties stemmed from a total disregard for formal planning. He failed to provide a clear view and direction for
each business. No attempt was made to prescribe what needed to be accomplished, when, and by whom. He simply reacted and allocated his
time and his firm's resources toward the most pressing problem of the day. Consequently, most efforts were temporary fixes that added little to
the development of his firm. In addition, he regularly missed important and potentially rewarding bids and contracts because his focus was on
putting out yesterday's fires rather than looking for tomorrow's opportunities. Strategic planning helped the man understand his total business
better and develop some concrete moves to enhance his competitive position. Because what needed to be done was now clear, meaningful
delegation was possible. The young businessman was free to
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concentrate on making contacts, meeting potential customers, and engaging in the necessary public relations work he was uniquely qualified
to perform. Important opportunities were realized and acted on, and internal operations ran more smoothly.
The above example suggests a third benefit of strategic planning. As the firm's direction became clearer, employees were allowed to make
decisions. They were allowed to use their skills more fully. They became surer of themselves and more comfortable in their roles, and their jobs
were enriched. Most workers have a strong desire to know what's going on and how their efforts contribute to the overall business objectives.
Without a clear notion of these objectives, employees are often frustrated and dissatisfied. Planning helps employees become part of the
organizational team. As employees know more of what the owner has in mind, they become more motivated, more willing to suggest ideas, and
more willing to exert the extra effort needed to give the business an edge over the competition. Because a small firm in particular is
competitively vulnerable, its employee efforts and suggestions often make the difference between success and failure. Indeed, as business
leaders clearly communicate direction, philosophy, and objectives to their workers, the returns are likely to be dramatic.
Fourth, a business plan is useful to the board of directors or the advisory board. These members are not involved with the day-to-day operations
of the firm even though their job is to offer guidance and advice. The plan gives them a basis for analyzing, evaluating, and making suggestions
for the firm's overall operations.
Finally, the existence of a formal, overall strategic plan makes the creation of special-purpose plans, such as those for financing, much easier. In
fact, the strategic plan contains most of the information used in developing specialized plans. Although a manager may feel that planning is
difficult and time-consuming, the impact of the planning process is overwhelmingly positive.
The Strategic Planning Process
Dwight D. Eisenhower once said, "Plans are nothing; planning is everything." While we would question whether the strategic plan itself is nothing,
it certainly is true that planning is everything. Although it is important for all businesses to have a written plan, the strategic planning
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processthe focus of this section and the basis for the rest of the bookis critically important for new and emerging businesses.
Defining Strategic Planning
Strategic planning is a powerful management tool designed to help new and emerging businesses adapt to anticipated environmental changes.
More specifically, the strategic planning process provides an overview and analysis of a business and its relevant environment. It describes the
firm's current condition and recognizes the key external factors affecting its success. The process then prescribes an outline, or action plan, of
how the business will proceed to capitalize on its strengths and minimize its weaknesses and threats.
Although business managers are occasionally asked to write business plans in order to secure financing, these should not be confused with
strategic planning or strategic plans. Investment-oriented business plans are single-purpose documents. As such, they tend to be very specific,
reasonably brief, and somewhat optimistic overviews of the business, its product line, its management, and the proposed use of funds. By
contrast, strategic plans require more depth and breadth of coverage. Their focus is the future. They consider internal strengths and
weaknesses, for both may affect the strategy selected. They are regularly used and frequently revised to reflect new trends and developments.
The strategic plan is both an analytical tool and a working document that guides management action over a specified period of time.
Determining the Planning Horizon
The noted economist John Maynard Keynes once said, "In the long run, we are all dead." We need to be more specific than that in determining
the short-term, medium-term, and long-term goals for a firm! In general (but not always), long-term planning refers to anything beyond the next
five years. A three-year period is often the target for medium-term plans. Short-term plans are generally for one year or less. Accountants, on
the other hand, often refer to anything over one year as long range.
Actually, the determination of long-range versus short-range goals is a function of the industry and the type of product or service. A utility
company necessarily looks 15 to 20 years ahead because of how long it takes to
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build a power plant; a small janitorial service may have no reason to look beyond a year; and a small manufacturer looks somewhere in between.
The above examples introduce a key factor in planningthe firm's planning horizon. The planning horizon is the time required to implement a
major strategic change. Beyond that time period, a manager need only do some casual monitoring because the business can react to any change
that might develop.
Suppose, for example, I own a restaurant. I could spend a considerable part of my time studying new housing developments and specific
projected growth areas of the city. On the other hand, the total time required to build a new restaurant is probably between six months and one
year. Because migration is a relatively slow process, I'll have ample time to study site locations once I determine that I do, in fact, need to expand.
Remember that strategic reaction time is the concern here. The environment must always be monitored to determine developing trends. But
serious study need only be done when either a strategic change is desired or when significant changes in the environment dictate study. Attempts
to react to each minute change will lead to overreaction and/or unnecessary concern with the long run when it cannot be adequately assessed, as
shown in the following example.
An Italian restaurant had an excellent reputation for good, moderately priced food, but its location and size eliminated a major portion of the city's
population as potential customers. The owner adroitly decided to add a new location in a growing section of the city, close to a major shopping
mall. The move was handled well, and profits flourished because there were few similar restaurants in the area. Less than three years later, the
competitive environment had changed drastically. Two national restaurant chains featuring Italian cuisine opened in the same area of the city.
Two other restaurants opened at sites within two blocks of the restaurant. At first glance, this would appear to be a classic case of bad planning.
Shouldn't the owner have been able to predict three to five years in advance? The answer is no. Even though the restaurant is now in a highly
competitive market, no way could the increased competition have been projected. The changes were outside the manager's strategic reaction time.
The planning horizon was not that distant and should not have been expected to be. The move was a wise move at the time.
If managers extend the horizon too far, they may lock themselves into a strategy that later becomes inappropriate. If the horizon is too
short, opportunities may be missed. Underestimating the planning horizon is the more frequent error. Most firms tend to concentrate on the
short term,
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and we often encourage managers to look farther out into the future. Many managers are so busy fighting fires that they don't take time to
consider needed changes within their planning horizon. Managers must consider how long it will take to react to a change in the environment
and plan accordingly.
Planning and forecasting are especially difficult for both new and emerging businesses. In both cases, the firm is being taken into uncharted
territory. However, it is critically important for managers to attempt to assess the dynamics of the environment being faced. Only when an
accurate analysis of the competitive environment is made can the owner or manager of a new or emerging firm make decisions that are logical
and defendable.
The Strategic Planning Model
Figure 1.1 highlights a strategic planning process for new and emerging businesses. The process is comprised of three phases. The premise
phase occurs as the manager looks toward the future and formulates a vision for the business. This phase also includes the development of a
mission that provides a broad direction and philosophy for the business.
During the analysis phase, managers go through a number of steps to assess the business's environment and determine its strengths and
weaknesses. They must develop a list of the key threats and opportunities in the firm's relevant external environment by studying
present environmental forces, by projecting trends, and by anticipating changes. Managers must not only identify and track changes in
key environmental factors, they must carefully assess the impact these forces and changes will have on the firm and its operations.
Environmental analysis is therefore future oriented, seeking to recognize the problems and potential created for the firm by changes in
its environment.
Whereas environmental analysis concentrates on forces external to the organization, internal firm analysis evaluates the firm's internal strengths
and weaknesses. An astute manager will study a number of important issues as part of determining the strengths and weaknesses of the
business. These will include assessing the financial status of the firm, analyzing human resource needs, studying marketing capabilities, and
determining the ability of the company to produce a quality product or service.
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Figure 1.1
Strategic Planning Model
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Environmental and internal analyses enable the firm to portray carefully and objectively both its special competencies and its relative
competitive weaknesses. A distinctive competence is any area in which the firm possesses a meaningful edge over its competitors.
Similarly, competitive weaknesses represent areas in which the competitors' relative strengths are significant or overwhelming. Armed with
this information, the manager can realize and capitalize on evolving competitive opportunities (distinctive competencies) and develop
protective measures to minimize the harmful impact of materializing threats and obstacles (competitive weaknesses).
After environmental and firm data have been analyzed and evaluated and the firm's distinctive competencies and competitive weaknesses
delineated, the manager is ready to embark on the strategy development phase of strategic planning. Here, the manager uses the results of
the environmental and firm analyses, contemplates the implications, and structures a working plan to guide the firm's activities.
The first step in the strategy development phase is to determine the overall growth strategy for the business. How much growth is desired? How
will the firm compete? What will be the primary strategic thrust in the near future? This first step is a logical, functional, and integral process
that can guide the firm along the path of success.
Once the firm's overall growth strategy is established, the manager of the emerging business will then focus on specific goals. Setting achievable
and measurable goals for the company as a whole and for operating units or divisions is an important process.
Unit strategies breathe life into goals. Essentially, a goal statement declares what a business wants to do or wants to be, while unit strategies
declare how the business is going to do it. Decisions to segment the market, change pricing, alter sales methods, acquire additional funds, and
change production methods are examples of unit strategies undertaken to move the firm toward the realization of its goals.
The best strategies in the world are of limited value if they are not written down. Our final chapter presents and discusses a format for the written
plan. Appendix A contains an example of a completed strategic plan based on a real business that can be used as a guideline for developing a plan
for any business.
Figure 1.2 is a sneak preview of the strategic plan format. As you move through the book, you may want to refer back to Figure 1.2 to see how
the actions discussed fit into the final strategic planning document.
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I. Vision statement
Mission statement
II.
A. Product line or services provided
B. Philosophy of the business
III. The business and its environment

A. General environment characteristics
B. Industry environment and competition
C. Location description
Distinctive competencies
IV.
V. Growth-strategies and goals

A. Company-level strategies
B. Company goals
1. Horizon goals
2. Near-term goals
Unit-level goals and strategies
VI.
A. Marketing
1. Target market
2. Product mix strategy
3. Pricing strategy
4. Promotion and selling strategy

5. Distribution strategy
B. Operation
1. Facilities
2. Make-or-buy decisions
3. Lease/purchase of equipment
4. Vendor selection
C. Human resources
1. Employment strategy
2. Promote from within
3. Wage/salary/benefits strategy
D. Financing
1. Debt/equity strategy
2. Capital sourcing strategy
3. Growth/stability strategy
4. Financial projections
VII. Target goals and target action plan
Figure 1.2
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Each chapter concludes with ideas, guides, and a few caveats for those who are consulting with business owners in addition to the Focus in Chapter
2 on managing the consulting process. Even though some readers may be students in a small business consulting class, some may be consultants,
and some may be owners or managers of emerging businesses, we hope that ''The Consultant's Viewpoint" section in each chapter provides food
for thought to all readers.
Enabling the Planning Process
Two partners of an emerging business once approached one of us with an offer to pay (presumably big bucks) for writing a business plan.
Consultants should never take that on as an assignment, and business owners should never ask. It is wise, however, to ask consultants to
facilitate the planning process.
Note the difference between consultants writing a plan and facilitating the planning process. Consultants should enable planning, but they should
resist writing a plan for a business owner for one key reason. For planning to be effective, the business owner must be actively involved. It is
useful to draw upon a consultant's expertise, but the plan has to have the imprint of the owner. The owner is the one with intimate knowledge of
the company's strengths and weaknesses and most likely knows the industry better than the consultant. The consultant's role is to draw out all this
information in an interactive manner and assume an objective role during deliberations.
Plans Versus Planning
The Eisenhower quote a few pages earlier is the key to the issue of plans versus planning. If the planning process does not result in a document
that can be referred to and used for future reference, the process is of minimal value. However, if the focus is on the document instead of the
process, the task will be shortsighted and incomplete. It is the planning process that uncovers new information. The process ensures that an objec-
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tive analysis of the firm is done. The planning process results in alternative strategies for the business that can then be considered
before implementation. Only once the planning process has been done carefully can the written plan become a guide for action.
Communicating the Plan
If the planning process has been done well, key managers in the emerging business should be aware of the strategies being developed. Indeed,
they will have been involved in that process. But others in the company also need to know what the firm's strategy is. Employees in a
production facility can better understand their role in the company if they can understand where the company is headed. The sales force can sell
the firm's products better if they know how those products are positioned compared with competitors' products. Even the morale of staff
workers should be better if employees fully comprehend the mission and vision set by the owners, especially true in the emerging business
because all members will likely be under stress. A strategic plan is primarily used to guide the direction of the firm. But don't underestimate the
power of a well-written, well-communicated strategic plan as a motivating tool.
Discussion Questions
1. Why is strategic planning perhaps even more important for a small business than it is for a large business? Why is it critical for
emerging businesses?
2. If planning has so many benefits, why don't small business owners do it?
3. Choose a firm with which you are familiar. What specific benefits could arise from doing formal planning in that particular firm?
4. Estimate the appropriate planning horizon for the following:
a. a software development company
b. a bowling alley
c. an auto repair shop
d. a manufacturer of circuit boards for high-tech diagnostic equipment
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5. Explain how the major parts of the planning model could be used in the following:
a. national planning for a country
b. individual career planning
Notes
1. For example, see LuAnn R. Gaskill, Howard E. Van Auken, and Hye-Shin Kim, H. "Impact of Operational Planning on Small Business
Retail Performance," Journal of Small Business Strategy, 5(1), 1994: 21-36; LuAnn R. Gaskill, Howard E. Van Auken, and Ronald A. Manning,
"A Factor Analytic Study of the Perceived Causes of Small Business Failure," Journal of Small Business Management, 31(4), 1993: 18-31; and
Charles R. Schwenk, and Charles B. Shrader, "Effect of Formal Strategic Planning on Financial Performance in Small Firms: A Meta-Analysis,"
Entrepreneurship: Theory and Practice, 17(3), 1993: 53-64.
2. Joseph Rosenbloom, "Follow the Leader," Inc., October 21, 1997, p. 83.
3. Stephanie Gruner, "Death By Unnatural Causes," Inc., October 21, 1997, p. 62.
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Chapter 2
Managing the Consulting Process
In examining strategic planning from a consulting perspective, key planning themes are not only specified and explained, but careful attention is
given to how business consultants can use strategic planning tools as they interact with client businesses. Subsequent chapters provide guidance
on how topics can be approached to build client rapport and generate meaningful and usable strategic plans. This chapter introduces some general
guidelines for consultants that are important when they're working with new and emerging businesses. These guidelines will help to create good
consultant-client relationships and to manage the overall consulting process. After reading this chapter, you should be able to
• understand the unique nature of consulting with new and emerging businesses;
• recognize the various types of consulting that are frequently encountered;
• understand the importance of building rapport and be aware of approaches that can help this process;
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• recognize how the problem definition stage of the consulting process can be handled;
• understand some of the details and complexities involved in gathering and analyzing data; and
• have in mind a format for making recommendations to clients.
Consulting with new and emerging businesses can be an exciting and challenging experience, allowing consultants to put their knowledge
of strategic planning to use in concrete situations. No longer merely an academic undertaking, strategic planning becomes a mechanism for
helping real people deal with real business issues. The twists and complexities encountered in this process are always somewhat novel.
The frustrations are numerous. But the rewards derived from helping owners of new and emerging businesses grasp and deal with their
competitive situations are significant and far-reaching.
As we noted in Chapter 1, some readers are professionals, some want to start a consulting business, and somethe majority, we suspectare students
in business classes at colleges and universities. Among the students, some are in a typical small business management course or an
entrepreneurship course, whereas others are in consulting classes where much of the focus is on the consulting experience. A significant
percentage of these consulting students are in a program known as the Small Business InstituteTM (SBI), which was funded by the U.S. Small
Business Administration for more than 20 years. Although that funding has since been eliminated, the program continues to exist in many
colleges and universities with funding provided by the college or other sources. Some institutions now refer to the program simply as a business
consulting class, a senior project class, or a small business analysis class. Indeed, clients for many projects are not businesses at all but rather are
nonprofit organizations. Technically, these are not businesses because they lack the profit motive, but the consulting process is much the same.
Because the results of consulting can mean the difference between a business's continued growth and its stagnation, the consulting process can
never be underestimated. Indeed, a consulting project can sometimes mean the difference between the continuation of the business and its
termination. Consider the following examples. A student consulting team once worked with a business whose owners requested a complete
internal and competitive analysis along with precise recommendations of what should be done to reverse a downward spiral in revenues. The
students realized that the business owners, a middle-aged husband and wife, were nice people literally at their wit's end. One student noted,
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quite appropriately, "These clients are depending on us. They intend to do whatever we tell them. It's kind of scary to think we are going to play
a key role in the fortunes of these people and their livelihood." When another team presented its final report to the client, the client informed
the team that it had reinvigorated his desire to run his business. He had never told them before that he was really planning to sell the business.
Now, however, because of their interest and suggestions, he was enthusiastic about continuing and growing his business.
Certainly, all consulting interventions do not hold the same dramatic prospects these students faced. Yet working with owners and managers of
new and emerging businesses poses unique demands and can be intimidating. At the same time, business owners and managers must realize
that consultants are only advisers. They do not dictate what the owner must do, and owners are under no legal pressure to accept what
consultants recommend. Because each party to the consulting process should have realistic expectations about both the process and its possible
results, the nature of consulting and a recommended four-phase consulting process are examined in the following sections.
The Nature of Consulting
Clients typically seek consulting assistance for one of two reasons. The first is that the company is experiencing some type of problem. The
manager may or may not even be aware of what the real problem is but knows that something is wrong. The owner asks a consultant to study
the business objectively, identify problems and areas of concern, determine causes of the problems, and recommend solutions.
The second reason for using a consultant may be more relevant for new and emerging businesses. In these cases, the business is growing but
clients need assistance in enabling the growth. Clients recognize that growth, left unchecked and unplanned, can be disastrous in a dynamic,
competitive environment. Consider the following example.
A dentist had an excellent practice involving two offices, another dentist, and a number of hygienists. After several years, the dentist decided it
was time to grow by taking advantage of a trend in his profession of buying existing practices as current owners retired. In addition, the dentist
felt that an additional servicedental implantscould be provided to baby boomers and senior citizens. With these two goals in
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mindexpanding the number of offices and expanding the types of services offeredthe dentist called a consultant, who provided help in two
areas. First, the consultant conducted focus group research to determine the willingness of senior citizens to accept the concept of dental
implants. Second, the consultant spent considerable time with the dentist's growing company to develop an organizational structure and
common organizational culture for the entire company.
Consultants can provide an objective analysis of opportunities. And not only can they provide candid interpretations of internal operations, but
they also can help managers of new and growing companies control business growth so a stable financial condition is maintained as the
companies grow.
Types of Consultants
The first type of consultant is the large consulting firm such as Andersen Consulting, Hewitt Associates, or PricewaterhouseCoopers. Large
firms often have specialties in addition to doing general consulting. Andersen, for example, specializes in information systems, while
Hewitt specializes in employee benefits.
The second category is the small consulting firm, which may consist of only one or two individuals and a support staff. These firms, too, may be
either specialists or generalists. Some firms, for example, specialize in business valuation. Some may offer accounting services primarily, and
still others may be small market research firms.
A third type is the part-time consultant who has another job but does consulting on the side. Many business professors do consulting in their areas
of specialty and are even encouraged to do so by their universities. Some part-time consultants work for large companies and do consulting after
hours. For example, a person who works in the information systems area of a hospital may moonlight as an information systems consultant.
The fourth kind of consultant is the not-for-profit organization. Nonprofit consulting organizations, such as those underwritten by the Small
Business Administration (SBA), provide free or low-cost consulting services by staff, volunteers, or students. The Service Corps of Retired
Executives (SCORE) is comprised of retired volunteers who previously worked in business and whose minor expenses are covered by the
SBA. Another SBA-funded operation is the previously noted Small Business Development Center, which typically receives both state and
federal funding in
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order to provide staff consultants to area businesses. Universities often have some form of consulting course or project for their students, who
gain extensive hands-on consulting experience while providing supervised consulting to hundreds of small companies each year. In addition to
SBA-sponsored consulting, many universities have some type of center for business research that provides fee-based consulting. Businesses
request and may receive specific consulting help from a research center; consulting fees and contract terms are then determined. At times
businesses indicate their consulting needs and encourage the submission of bids so that the university research center is only one of many
consulting possibilities for businesses. Other not-for-profit and trade associations also provide consulting either free or for a modest fee.
Types of Consulting Projects
Just as there are many different kinds of consultants, there are many different types of consulting. In a one-time presentation to a client or client
group regarding some business topic, the consultant makes a speech to a client group or holds a seminar on some topic. Presentations often pay
modestly, but such engagements may lead to more one-on-one consulting from members of the audience. A second type of consulting is
technical consulting in which the consultant provides expert information to clients. This, too, may lead to additional engagements. Third,
consultants often will be called in to do extensive market research for clients, in which case a significant amount of hours may be billed either on
a per-hour or flat fee basis. Finally, consultants may facilitate the planning processes of a client company by meeting on an ongoing basis with
the client and key members of the client's organization. The consultant helps the organization determine a vision, set strategies, or solve
significant problems.
The Phases of the Consulting Process
The four phases of consulting, discussed below in detail, are the rapport-building phase, the problem identification phase, the data-gathering
phase, and the recommendations phase.
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Building Rapport
No matter how talented consultants may be, those talents are only recognized and appreciated by clients when a base level of rapport and trust
is established. Some clients are, by nature, open and accepting peopleothers more guarded and uncertain. All clients, however, must have
confidence in their consultants if they are to work with them to produce valued changes in the business. When a manager engages a consultant,
that manager is entrusting certain business revelations and outcomes. For most small business owners, who have a tendency to value
independence and self-sufficiency, this act of trust is not taken lightly nor entered into without serious deliberation. The consultant must act to
build rapport, ensure confidence, and establish a working foundation of trust.
Confidentiality
Business clients need assurance of confidentiality. The consultant must explain to the client that all information received about the business will
be treated with strict and absolute confidence. If there are exceptions to this statement, those exceptions need to be delineated and explained at
the time of engagement. For example, a student consulting team routinely has to share information with the faculty member directing its project.
Consultants must present their claims of confidentiality in a serious and convincing manner if they are to win the acceptance of their clients.
More important, it is the professional and moral responsibility of consultants to abide by the terms of the confidence they have guaranteed.
Competence
The underpinning of confidence and trust rests on competence. If clients feel that consultants are skilled and knowledgeable, they are more likely
to reveal and share information and ideas. Consultants must provide information to clients that communicates competence. Student teams
sometimes have difficulty here, but they may find that providing résumés showing classes completed and jobs held may add to their credibility.
Professional consultants may also encounter a fear of their incompetence among clients. Consultants should communicate their areas of
expertise to clients in initial meetings so that clients will feel comfortable with the consultants' level of competence.
Deadlines and Commitments
Confidence and trust are built incrementally through seemingly small actions. A key initial factor here is the way deadlines and commitments
are honored. If a consultant tells a client that a summary of the initial meeting will be prepared by Tues-
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day, the summary must be delivered by Tuesday. If a consulting team agrees that the entire team will meet with the client at 6:00 PM Friday,
the entire team should be there. Such small commitments are the primary way that a client can judge whether the consultant will treat more
sensitive and significant revelations with appropriate scrutiny and diligence.
It is also important that a consultant not make commitments he or she can't keep. A business owner, on the other hand, should recognize that a
consultant is busy and the owner's business is only one of the consultant's many responsibilities. Both client and consultant must be clear and
up front about expectations and schedules.
Establishing confidence between client and consultant is the real key in the rapport-building phase. Keep in mind, however, that the level of
confidence and trust between the two must be ongoing. Every contact and every interaction between client and consultant should continue to
instill and build confidence.
Defining the Problem
Early in the consulting relationship, business managers should be encouraged to define their problems or needs as carefully as possible for
two reasons. First, defining their problems forces owners to think through the factors and issues they are confronting, often providing valuable
input and information the consultant can use. Second, it often helps clients move beyond symptoms, pushing beneath the surface to reveal
underlying causes of organizational problems. This presumes, of course, that clients are aware of their needs, which sometimes is not the case.
In fact, clients' awareness of their needs, when it exists, is a key factor in problem definition.
Problem Awareness
Frequently, small business clients are aware of their needs but simply don't have the expertise to address them. Owners of new and emerging
businesses have an additional problem: They may be aware of their needs but may not have the time for the necessary analysis and
implementation. For example, a client may be aware that current advertising efforts are woefully inadequate and yet be so embroiled in day-to-
day operations that there is simply no time to analyze and develop a well-orchestrated advertising plan. Or perhaps, even more typical, a client
may have adequate technical expertise in the design and manufacture of a product but virtually no understanding of, nor interest
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in, the dynamics of the marketing function. In such situations, the client understands the strategic necessity of getting help and thus decides to
entrust a certain area of business to a consultant's expertise.
It is not unusual, however, as the consultant engages in the details of strategic analysis, to uncover concerns and needs that the client didn't
know existed. Then the consultant's first task may be to educate the client. Generally, this means that a client must not only be told that an
unrecognized need exists but must also be convinced that the need is real. The best way to convince clients is to show them clear, documented
evidence. Business owners respond to the bottom line, and if they can be shown the bottom-line implications of dealing with a problem, the
likelihood that they will go along with a solution is greatly enhanced. For example, showing a client that the firm's financial ratios vary
dramatically from industry averages may encourage the owner to pay attention to what is causing the variance.
Care must be exercised at this stage. Some clients feel threatened when consultants uncover new concerns and problems. Often, clients' pride
and ego are bruised, so consultants, therefore, must be firm but supportive. Consultants must convey a positive image that encourages clients
to accept the issues and become part of the plan to remedy the problems.
Statement of Work
At a point early in any consulting intervention, a clear statement of work should be developed by the consultant and presented to the client.
While responsibility for drafting the statement of work rests with the consultant, the development of the statement cannot be a unilateral effort.
The client must contribute to the development of the statement, and points of disagreement must be discussed and negotiated. The consultant
must understand the client's business situation and relevant issues to such an extent that the statement responds meaningfully to the needs of
the business.
In all likelihood, some problems will not be addressed. Rather, consultants may select particular areas in which immediate action is necessary.
Or they may select areas that mesh best with their own background and experience. Or they may select areas in which it is clear that owners
don't have the time or expertise.
The statement of work becomes an agreement between the parties that outlines the nature and scope of the consulting that will be performed.
This statement establishes and formalizes each party's expectations of the other and should clearly indicate the type of work to be done. However,
it will not and cannot, at this early juncture, prescribe many of the specifics
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and details that will no doubt occur during the consulting process. The statement should be rather broad, while still defining the topic of
coverage. For example, if a client is seriously questioning the effectiveness of current advertising approaches, the statement may focus
broadly around the issue of advertising. The consultant may indicate that ''an evaluation of the current advertising strategy will be performed
and appropriate changes will be recommended." Although such a statement provides the consultant with considerable flexibility in terms of
approaches and execution, the client clearly knows what outcomes to expect.
Gathering and Analyzing Data
The common cliché in woodworking to "measure twice, cut once" is equally good advice for consultants. Consultants who do a thorough job
of gathering data and analyzing that data (measuring twice) will have a more successful relationship because their solutions (the cut) will be
better. Although detailed techniques of data gathering are presented in Chapter 4, some general themes are introduced here.
Preparation
Consultants have no alternative to hard work and diligence. They must be thoroughly prepared when meeting with clients. For most business
owners and key managers, the most precious and limited resource is time. Nothing frustrates owners more or is more destructive to the
client-consultant relationship than the client's perception that his or her time is being wasted.
Consultants must review documents and know as much as possible about clients before an initial meeting. They should understand what they
already know and what they must learn. And they must coordinate their questions so that client's time is used most effectively. Consultants
often study a client's industry in some depth (faculty members often require this of student teams) so that during an initial meeting they are
knowledgeable about the client's industry and the firm's place in it.
Listening
When consultants meet with clients, it is critical to let the clients talk. Often, consultantsespecially student teamsthink they have to impress
clients with their knowledge and background. While some of that is necessary to build client confidence, many consultants are reluctant to step
back and let clients express their views and impressions. Consultants must listen to what clients say, and they should take notes to have a record
of points to ponder and evaluate after they leave.
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Consultants should ask questions about areas of confusion or areas where more focus needs to be exerted to help clarify both the problem
and possible solutions. For example, if a client says she is having difficulty securing funds, probe for her impressions of why she is
experiencing difficulty.
Communication
One of the most common client complaints is that consultants don't let them know what is being done and what progress is being made. It's
critical for consultants to keep their clients well informed. Often, consultants are working hard analyzing data and searching for information and
see no reason to contact their clients. Clients, unaware of what's being done, perceive lack of contact as lack of interest. Consultants should
have regular informational updates with clients. The schedule and frequency of updates is really a function of both consultants' and clients'
needs. The contact does not always have to be in person, but it must occur. Because credibility and trust are built over time, contacts become
building blocks of the consultant-client relationship.
Search for Practical Answers
Seeking practical solutions is one of the greatest challenges consultants face. Frequently, consultants, assuming that resources are unlimited,
search for ideal and optimal ways to address client concerns and needs. Unfortunately, new and emerging businesses rarely operate in an ideal
world, which in no way suggests that the consulting analysis should proceed without careful scrutiny and rigor. However, a consultant must
always be aware of the realities the client faces. Such realities as depleted finances, tight cash flows, and short-run commitments to existing
technology may limit possible solutions. Inadequate cash and frequently changing technology are two of the most significant problems facing
growing businesses. Solutions that ignore these issues will be shortsighted.
The preferred solution may do little to advance a business in its strategic efforts. Shenson and Nicholas note that successful consultants
suboptimizethat is, realize that an optimal solution may be too costly to be reasonable and practical. 1 Consultants must propose the best
solutions possible given the constraints of time, money, and resources.
Making Recommendations
A successful consulting engagement culminates in recommendations being shared and understood. This does not presume that owners
and consultants will always agree. Nor does it assume that clients will act on
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and implement all recommendations. Rather, clients must understand the complexity of a consultant's recommendations and the reasoning
behind them.
Final Written Report.
After conducting all analyses and determining what recommendations to make, a consultant must formalize his or her conclusions and rationale in
a written document to be presented to the client. Prescribing the exact form and content of this document is difficult and is largely a function of
the nature and scope of the project. In the case of student consulting projects, the supervising faculty member may prescribe the final report
format. Yet certain themes should be considered and included in the written report as outlined in Figure 2.1.
The report must be written to the client and for the client. Thus, the tone of the report should take the client's background and level of
comprehension into consideration. If the client is likely to be unfamiliar with specific jargon and terminology, a consultant should avoid those
phrases even though they may be accurate and technically correct. In some cases, reasoning and rationale for certain conclusions may require a
detailed explanation. In all cases, the logical development of the consultant's case should be clearly and succinctly presented.
The written report should begin with an executive summary that is no more than one or two pages long. It provides the client with a snapshot of
the analysis done, the conclusions reached, and the recommendations offered. Detail and rationale are not possible here. The executive
summary captures the client's interest and provides the impetus for digging into the heart of the study.
nAfter the executive summary, the purpose of the consulting project should be detailed. It is a refinement of the statement of work that was
developed early in the consulting relationship and notes the areas covered in the report and the basic expectations that the report seeks to
I. Executive summary
II. Purpose of the consulting project
III. Methods and procedures
IV. Findings and recommendations
V. Implementation
VI. Appendixes
VII. Bibliography
Figure 2.1
Outline of the Final Written Report
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meet. This section may also note any constraints that limited the consultant in executing the statement of work.
Next, the report should indicate the methods and procedures used to gather data and to structure the conclusions and recommendations. This
section may be detailed but shouldn't ramble. The intent is to demonstrate to the client the thorough and complete nature of the processes used to
reach final decisions. Beyond that fundamental perspective, most clients don't care about the details and nuances of the procedures, so they
shouldn't take up extensive portions of the report. If particular methodologies need to be detailed, such as the design of the survey instrument or
method to derive the sample population, these should be mentioned in the methods section and explained in more detail in appendixes. This
allows those who are interested to examine the methods without frustrating the typical reader or taking the focus from the action items of the
report.
The main portion of the report presents the findings and recommendations. Both conclusions and their rationales must be carefully and
fully developed. As noted earlier, business owners tend to be bottom-line people. Therefore, arguments that demonstrate financial or
competitive advantages are particularly effective.
A final section should discuss how recommendations can be implemented. Again, the practical nature of small business owners suggests that
they appreciate ideas and thoughts on how recommendations can be effectively put into action.
Appendixes that provide more specific explanations of methods, offer supporting evidence and documentation, and present graphs and
exhibits conclude the report. They are often interesting additions that augment and support the report's narrative portions. Finally, a
bibliography should be included if appropriate.
Throughout the writing process, every effort should be made to be direct and succinct. The goal is not to create award-winning literature:
The purpose is to explain findings and help guide the client to necessary action.
Oral Presentation
Consultants should meet with clients to orally summarize the written report and allow for client questions. The oral summation is a chance for
consultants to communicate the importance of their recommendations and the potential impact on the business of the recommendations.
Consultants shouldn't just read the written reportthat's a waste of timebut should present highlights. It's helpful if clients have had a chance to
review the written report; and in most situations it's helpful if a visual presentation accompanies the oral presen-
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tation. A visual presentation helps consultants better structure the oral presentation and helps clients follow it as well as provides an opportunity
to return to previous points if desired.
The oral presentation is also an opportunity for consultants and clients to discuss ideas not included in the report, some of which clients may
have recently developed. Possible problems with implementation should be noted, and potential developments in the industry might be discussed.
Finally, consultants should always leave the door open for additional meetings and additional consulting. Repeat business is easier to get than
new business. A client who has been happy with a consultant often uses that consultant again. The consulting process began with building
rapport, and so it should end in a way that allows the rapport to continue.
1. What are some of the ways consultants can build trust and rapport with clients?
2. Why are clients often reluctant to share sensitive information (such as financials) with consultants? How can consultants help clients to share?
3. What are the key actions consultants need to take to build a meaningful consulting relationship with clients?
4. Highlight the complexities of the problem definition and the data-gathering and analysis stages and indicate steps that help address
these complexities.
5. Why is it so important to make sure that the final written report is client focused rather than technically or academically focused?
Notes
1. Howard Shenson and Ted Nicholas, The Complete Guide to Consulting Success (Chicago: Dearborn Financial Publishing, 1993).
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Chapter 3
Providing Direction for Growth and Change
The definition of an emerging small business in Chapter 1 emphasizes the business's focus on actively pursuing growth. To grow successfully,
a business must be involved with the process and dynamics of change. Change can be chaotic, or it can be focused with a clear sense of
direction. Vision and mission statements help clarify a business's direction. Therefore, the themes of change, vision, and mission become
underpinnings of meaningful strategic planning for new and emerging small businesses. Once you have completed this chapter, you should be
able to
• understand the forces for change that affect new and emerging businesses;
• recognize the foundations of resistance to change and apply an approach for managing growth and change;
• recognize the power of innovation and the ways a small business can encourage creativity and innovation;
• understand the value of a vision statement and how to craft a meaningful vision for a business; and
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• understand the value of a mission statement and be able to develop a mission statement for a business.
A Focus on Growth and Change
Making changes is often one of the most difficult, troubling, and perplexing obstacles that a business encounters. Even in the face of
tremendous growth opportunities, implementing change often thwarts a business and its people. Thinking about business growth and
change introduces a fundamental dilemma of business life. On one hand, most managers understand that a business that doesn't change will
have difficulty surviving in a competitive environment. On the other hand, the process of change is often met with resistance and a strong
tendency to maintain the status quo.
Forces for Change
Forces for change surround new and emerging businesses. Some of these forces are clearly recognized; others are more subtle. Consider the case
of Terry Precision Bicycles for Women, a business started by Georgena Terry, a biking enthusiast and Xerox employee. Terry was convinced
that the high-quality road bikes on the market were designed for men, causing discomfort and pain by forcing women to bend over farther than
normal. In response, Terry designed a custom bike frame for women that shortened the distance between the seat and handlebars. Terry
Precision Bicycles for Women seemed to tap an unmet need in the market, and its high-quality bikes, selling from $600 to $1600, experienced
strong initial success.
Terry did a number of things right. First, it had a clear understanding of the nature of bicycle customers and what they needed in their products.
Second, careful research of the competition was performed that found current products didn't address the needs of female bikers. Third, it developed
and marketed a product that addressed a market niche broad enough to provide meaningful revenue and profits. Although this initial picture appears
to capture the essence of small business success, that success will be short-lived unless there is a proper posture toward change.
Terry's continued growth depends on recognizing the forces for change:
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• Response of competitors
• Proliferation of technology
• Rising and shifting customer demands
• Push for improved products and services
• Economic trends
• Drive for quality and efficiency
• Changing rules and regulations
• New and unexpected crisis
One of the most powerful forces for change is the response of competitors. For example, Terry's competitors, such as Trek and Cannondale, are
large and well established. Are these competitors likely to produce competing models? Will they present an advertising blitz to convince
customers that Terry's product is not really unique? Terry is prompted to change because the competition is unlikely to stand still. Further,
customers are likely to expect more products and more improvements. Resting on past laurels is not a long-term option. Interestingly, Terry has
accepted the challenge of change. It recognized that many of its customers' concerns centered on the need to make the bike saddle or seat more
comfortable for women. Accordingly, Terry designed a new seat with a shorter nose that better fits a woman's body. This change, prompted by
new customer demands, is an apparent winner. Today, seats account for about 30 percent of Terry's business. 1
Building an Environment of Creativity and Innovation
The forces of change suggest that an emerging business should always be poised for change. Creativity and innovation must be watchwords and
guiding themes. And even though they go hand-in-hand, creativity and innovation are not the same. Creativity is a process that involves new and
different patterns of thinking and behaving. Innovation is the result of those creative activities. In simplest terms, creativity leads to innovation.
The emerging business needs to create an environment or culture that encourages creativity and innovation and views change as a key
foundation for continued business success. Let's look at some things a manager can do to foster such an environment.
Staying in Touch with Customers
One of the best ways to stay on the edge of creativity and innovation is to stay in close contact with customers and those you would like to have
as customers. If managers
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pay careful attention, customers will often signal changes, improvements, and innovations that are needed. Further, customers will also signal
areas of growth where meaningful business opportunities may exist.
Investing in Training and Development
There may be no better engine for creativity and innovation than the training and development activities of the businessan area many small business
managers avoid. Often, managers reason that training is expensive and that limited resources are best committed to more obvious, bottom-line
activities. Buying a new machine, purchasing a new software program, or repairing a press takes precedence over funds committed to the training
and development of people. Clearly, trade-offs are always involved, but training exposes employees to new ideas, new ways of thinking, and new
options for the business. It acquaints them with approaches that have worked for others. Many times, training is fertile ground for the development
of ideas and innovations that help the business position itself for growth. Jere Stead, former chairman of Square D and Legent Corporation, once
said that if he had $1 to spend, he would spend it on training. From training comes the insights needed to survive and grow.
Challenging Existing Procedures and Routines
Managers of emerging businesses must be willing to challenge existing procedures and routines, a particularly difficult action because most
procedures were originally initiated to help the business. Accordingly, it can be hard to recognize that procedures that made sense in the past
are now unnecessarily constraining or restricting the business as it grows. For example, a small business's requirement of top management
approval for expenditures can help ensure cost containment and build a culture of careful attention to financial control. Yet this same
approach can slow decision making and frustrate skilled managers as the business grows and responds to its markets.
Unfortunately, procedures and routines breed a life of their own. Often, we stick with them simply because "that's the way we've always done
it." Our rule of thumb is to challenge existing routines, subjecting them to a bottom-line litmus test. Namely, managers must ask, "Does this
rule, policy, procedure, or routine help the business as it grows?" If the question doesn't receive a solid affirmative response, careful
reconsideration of the routine should be taken.
Encouraging Risk Taking
Managers should encourage their people to be active risk takers. Recognize what this statement says and, more
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important, what it does not say. Risk taking doesn't involve wild, off-the-cuff whimsical movements with a gut-level feel that they make sense
and will prove to be business winners. Risk taking is careful and deliberate. It requires study and examination. Yet it recognizes that there are
no certainties in growing markets. At some point, the business must step forward and make its best, well-calculated decision, even though that
decision is wrought with uncertainty and risk.
Leaders must encourage their people to know the business landscape, to know their competitors, and to study and strategize. But they must
also encourage their people to think beyond traditional answers and take calculated risks. Whether such encouragement is merely espoused or
is actually practiced can be measured by how mistakes are handled.
Accepting and Learning from Mistakes
Many managers pay lip service to risk taking. It is a popular and trendy value for managers to espouse. Unfortunately, many of these same
managers, through their condemnation and punishment of failed risks, are able to drive creative risk taking from their business. Risk taking,
from time to time, will lead to missteps and mistakes; sometimes, even well thought out and carefully considered decisions are unsuccessful.
The market suddenly changes. The economy takes a sudden and unexpected dip. Consumers demonstrate a shift in their expectations and
preferences. And sometimes failure is the outcome of risk taking.
Innovative managers understand the dynamic of risk taking. They recognize that mistakes will occur but, more important, they view mistakes
as natural byproducts of creativity. Mistakes are to be dissected. They should be avenues of learning to avoid future occurrences. However, as
long as risks are taken and uncertainty remains, mistakes will occur.
A classic story will illustrate our point. Many years ago, a young manager was called to the office of IBM founder Tom Watson. The young
manager had misread a risky venture. Although he had carefully studied and prepared, the strategies he proposed failed in the uncertain and
dynamic information technology environment. He could have played it safe, but he took a calculated risk that cost the company over $10
million! Sitting in Watson's office, the young manager fidgeted nervously and offered his resignation. Watson's response was quick and
decisive: "You can't be serious. We've just spent $10 million educating you." 2 Watson's message and its impact are clear. Mistakes are part
of ongoing learning in a creative environment.
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Encouraging a Diversity of Opinions
First, innovative businesses genuinely encourage divergent viewpoints and perspectives, often achieved through balanced, representative teams.
No one necessarily likes or feels comfortable with the person who always seems to take a different spin on a topic or issue, the devil's advocate.
Few people actively embrace the employee who always seems to challenge conventional approaches and asks ''what if" questions. Yet
employees like this demonstrate precisely the diversity that must be present. Diversity of ideas is the springboard of creativity.
Second, diversity has meaning only if diverse views are actively considered, thoroughly pondered, and conscientiously weighed. The temptation
must be fought to dismiss differing opinions just because they are differenteasier said than done. It falls largely on management's shoulders to
demonstrate a respectful and positive approach toward diversity in order to unleash its creative potential for a business.
Sometimes, one of the best ways for an emerging business to ensure diversity of views, background, and talents is to hire people with skills that
are missing from the business mix. Often, founders recognize that while their novel ideas initially propelled the business, they don't have the
background to build an emerging business. They may need people on their team with richer management experiences. It takes strength of
leadership to admit such gaps, take action to fill such needs, and heed the advice of new managers. For example, everyone marvels at the
creative energies of the youthful founders of Yahoo!, Jerry Yang and David Filo. Yang and Filo recognized early opportunities as Internet use
was beginning to grow. Yet these company founders were astute enough to bring on board more seasoned managers who developed many of
the strategies that led to the business's phenomenal growth and success. Hiring Timothy Koogle as CEO and Jeffrey Mallett as COO brought
new approaches, such as upbeat marketing campaigns and charging fees to advertisers. The new managers helped transform Yahoo! from a
basic Internet directory into a pivotal hub of Internet activity. 3
Foundations of Resistance
Resistance to change refers here to the tendency of people in a business to maintain the status quo and keep things the way they are. Even
well thought out and logical change is often met with resistance. Why is this so? The status quo represents stability and consistency. For
many people, dealing with what is known provides a sense of security. Change
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implies uncertainty and risk. People are always wondering if they will be better or worse off as a result of change. Accordingly, there is
considerable stress that often accompanies change.
People who resist change are not bizarre or aberrant. In fact, people tend to resist change for such logical and understandable reasons, as
• not being convinced of the need for change;
• not wanting to lose something of value;
• not understanding the implications and assuming the worst;
• fear of failure or lessened effectiveness; and
• a low tolerance for change.
Many people resist change simply because they are not convinced change is needed. They may argue that the business is doing fine right now
and that it doesn't make sense to change what is already working. Others resist change because they are afraid they will lose something of value,
such as their current position, job status, power within the current business system, or even job security. Some people resist change because
they don't understand where the change is taking the business and what its outcomes and implications will be. Often, they make extreme
assumptions about the negative impacts of change because they lack evidence to the contrary. Some people resist change because they are afraid
they will fail or be less effective under the new system than they are now. This, too, is understandable. Interestingly, this fear afflicts a range of
people, even those who are quite skilled and talented. Finally, some people simply have a low tolerance for change. Their personality prefers
the structure and order that is destroyed by change and is therefore uncomfortable.
Because most resistance revolves around fear and misunderstanding, managers who wish to initiate changes should attempt to provide clear
direction and communication and deal with underlying fears.
Managing for Growth and Change
The preceding discussion has stressed the value and necessity of change, the impact of creativity and innovation within the change process, and
the power of resistance to change that must be recognized and addressed. It is the responsibility of managers to help their business move
through resistance to embrace growth and change. No magical steps exist, but managers of emerging businesses should keep in mind four
recommendations.
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First, managers must explain the need for change. As noted earlier, this need may be clear because the forces for change are so strong: The
competition may be threatening market share or new technology is demanding a more efficient approach. In such cases, the bottom line may be
so imperiled that owners and employees know a crisis is looming, and the need for change is clear. However, the emerging business may face a
different scenario: Business may be booming, new market opportunities may be apparent, and employees and owners may be experiencing
positive results. It can be difficult to explain the need for change under such conditions. Forward thinking, proactive change may be tough to
sell. Yet that is exactly the manager's job. By using existing evidence and logical projections, a manager must demonstrate the need for change
so convincingly that the broad majority of the company's employees recognize its necessity.
Once the need for change is established, a second recommended step becomes critical. Managers and other key leaders must provide a vision of
the change. (The vision statement is significant within the change process and is explained in detail shortly.) The vision must be clear and
convincing enough that it provides everyone in the business with a mental picture of what the process of change can yield. If the vision makes
sense, the logic and buy-in for change is enhanced.
The third recommended step is for managers to listen to and address the resistance that will naturally accompany any proposed change.
Remember, resistance is not a bad response; it is a response born of uncertainty, confusion, and fear. Therefore, communication is a key.
Fears should be addressed. Clarifications should be offered. New expectations should be presented. Managers should listen to the reasons for
resistance and respond as directly and honestly as they can. They should show employees both the organizational and personal benefits of
the change. Managers should explain where and how employees fit in the new scheme of activities. Getting employees actively involved in
planning and working through the details of a change can be an excellent approach for gaining needed input and acceptance. As a general
rule, people feel better about change when there is open, involved, and continual communication.
Finally, managers should develop a plan for change. People are more accepting of change when they believe there is a logical, well thought
out process of planned change in place. In many ways, this is one of the key values that a good strategic plan can help provide.
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Setting a Direction for Growth and Change
Some managers tend to write off or deemphasize establishing a direction for change in the strategic planning process, telling themselves that
they already know where the firm is headed. But vision and mission are among the most important considerations in the planning process. A
firm's vision and mission statements provide focus. Without such statements, the company may flounder, headed in no particular direction.
The resulting confusion may not only stifle the progress of the business but it may frustrate and demoralize employees.
Providing a Vision for the Business
Often, small business leaders and entrepreneurs are visionaries. Sam Walton of Wal-Mart, J. W. Marriott of Marriott Hotels, Paul Galvin of
Motorola, and Michael Dell of Dell Computers each started small businesses, but each had a vision for a new product, service, or method of
distribution. Their vision became the unifying force for their respective organizations.
Vision is a necessary ingredient for emerging businesses. As the business environment becomes more and more complex, it is necessary
for businesses to focus on the future so they will continue to meet the needs of an ever changing customer.
The Vision Statement
The vision statement is a comment on the desirable and possible future state that a business will strive to attain. It should be crisp, clear, brief,
and meaningfulnot a set of platitudes. It should be unique to the particular business, and it should excite and energize people about the business
and where it's headed. Such visions can be as straightforward as the one John Kennedy set for the U.S. space program in the early days of his
administrationa man on the moon by the end of the decade. It can be fundamental yet offer clear direction and intent. Although certainly not a
small business, General Electric states its vision as being either number one or number two in every business it's in. An emerging business may
have similar visions. For example, a small but rapidly growing optical firm established the vision of becoming "Number 1 in customer
recognition and choice in our region within three years." Or
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consider the visionary comment that Boston Beer Company includes as part of its company philosophy: "We are committed to making Samuel
Adams the largest and most respected craft or imported beer in the United States before 2006." Remember that visions need to be broad, yet
clearly offer direction and focus for the business efforts of the firm.
Development of the Company's Vision
Some may believe in a popular myth that business leaders are prone to have periodic flashes of brilliance, bringing them clear and inspirational
business visions. While such revelations may occur on occasion, they are far from the norm. In most cases, leaders evolve their business visions
through careful study and thorough understanding of their business and their competition, and by actively involving and listening to key
constituents. Talking to customers, talking with employees, and questioning suppliers and vendors can all breed the kinds of perspectives needed
to build meaningful visions. Straightforward inquiries such as asking customers "What would you like to see in a business like ours?" or "How
can we better serve you and your needs?" can provide key perspectives.
Communicating the Vision
If the vision is to have any meaningful impact, it must be communicated clearly to the employees who will share and work toward its success.
Most people argue that the leaders of the business must be the "lead spokespersons" of the vision. Essentially, this means that leaders must show
why the vision makes sense and is necessary. Leaders may have to win sentiment for the vision. They may have to display confidence and
enthusiasm for the visionactually a response to resistance to change. The goal of communicating the vision is to help secure buy-in for the
vision among all those affected by it. This includes helping people see that they have some part of the vision and that they have a place in the
business as it emerges and changes. Through such a process of careful communication, the vision can become an underlying force or theme that
guides business thinking and action.
Providing a Mission for the Business
Although the vision establishes a general directional tone for the business, it provides no detail or precision. For example, the optical business
noted above established the vision of being the customer's first choice but said nothing about how it intended to proceed to meet this
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vision. It is the mission that addresses some of the questions that the vision, by virtue of its thematic and inspirational tone, cannot. The
mission begins to focus and expresses additional precision.
The Mission Statement
The mission statement is a concise statement of the general nature and direction of the company. By carefully delineating the underlying aim,
scope, and direction of the business, the mission statement becomes an outline of what the company will do and what it will be. Although the
mission statement is purposely broad, it must offer a clear word picture of the firm. Often, an elaborate-sounding, sweeping compilation of
platitudes is offered as a mission statement. Such a statement fails to provide the precision and scope necessary to be useful as a meaningful
planning tool. The owner should ask, "What separates us from similar companies?" The answer becomes a unique mission statement that is the
basis for a definitive business strategy.
The Value of the Mission Statement
A written mission statement has two major values. The first is as a communication both inside and outside the firm. Naturally, the financial
community will be interested in the direction the company is moving. But perhaps more important is internal communication. Often, employees
complain that they never know what is happening. They don't know what management's plans are or how they, the employees, fit within those
plans, which makes it difficult for them to be committed and motivated workers. The mission statement helps clarify the firm's vision and the
employees' role in it.
The second major value is the commitment that the owner of the firm has to the mission once it is printed and publicized. If a concept or
philosophy is believed strongly enough to put in writing, then everyone affected can expect that the idea will be followed. It's like New Year's
resolutions, but with higher stakes. If you make resolutions but tell no one, there is no particular incentive to keep them. But if you write them
down, ponder them, type them up, post them on the refrigerator, tell your friends about them, maybe even wager that you will keep them, this
public commitment means you can't break them without losing face (or maybe money). In the same way, the written mission statement
commits the manager to the stated strategy and philosophy and may result in equal commitment by others in and around the business. Such a
commitment in no way suggests that a company's mission is cast in stone, never to be altered. Mission statements, as representations of the
firm's place in a dynamic environment, may change over time. However, such
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changes evolve as the firm assesses movements in its competitive situation. The mission statement provides a central focus and unifying drive for
the business within its planning horizon.
The First Part of a Mission Statement
The mission statement contains two major elements. Each should be given careful consideration.
The first element of the mission statement defines and clearly specifies the basic nature of the business. Four different areas must be considered:
1. The industry and product line of the company and the type of services provided
2. The firm's position in the distribution channel (Is the company a wholesaler, a manufacturer, a retailer, or a mail-order business?)
3. The prime goals of the firm (quality, breadth of product line, price, or service)
4. The target market (Who does the firm presently serve? Who does it intend to serve in the relevant future?)
By telling explicitly what the firm is, the mission statement also tells implicitly what the firm is not. These limiting statements serve as a control
to keep the general direction intact, similar to fences on either side of a highway. Consider the following example.
A woman decides to open a bicycle shop that sells and services bicycles. After a few months, she is offered the opportunity to add a line of
mopeds. Reasoning that mopeds are simply bicycles with a small motor, she adds the line. Later, the regional manager for Honda motorcycles
stops by. The local Honda dealer is retiring, and this presents the shop owner a once-in-a-lifetime opportunity to land a coveted Honda
dealership. Now she has a bicycle/moped/motorcycle business. Somewhat later, the entrepreneur is presented the opportunity to take on a line
of snowmobiles. Reasoning that snowmobiles really have much in common with motorcycles except that they run primarily on skis instead of
wheels, she adds this line too. The story could continue indefinitely as the woman adds garden tractors, lawnmowers, snowblowers, and so on.
The point is that the one-time bicycle shop has become a highly diversified dealership for a number of slightly related products. In the process,
the owner has overextended herself, is no longer able to do anything well, and has incurred substantial debtin short, she has lost control of her
operation. A well-written and closely observed mission statement would allow the owner to specialize in bicycles until she decided it was time
to expand. Then she could carefully evaluate the market and her
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financial ability to take on an added line. Lines would be added at a controlled rate and with adequate financing.
Many businesses, large and small, fail because of rapid, uncontrolled growth. For example, large businesses often acquire unrelated firms or
start new businesses in unrelated areas with the stated goal of broadening their earnings base or gaining a countercyclical business. Many of
these same subsidiaries are later divested as the parent firm's executives decide to "return to the things we do best." Obviously the
corporation's management strayed from its basic mission and later realized its error.
The Second Part of a Mission Statement
The second major element of the mission statement is an expression of the firm's management philosophy and underlying values. Even though
the mission statement by itself cannot create an organizational culture, it does define and espouse the kind of culture the owner wants. Over the
past dozen years, much has been written about "corporate culture" and its impact, power, and influence on the behavior and activities of large
organizations. The concept of culture is equally important for the small firm. The mission statement should capture the owner's basic philosophy
of how business will be conducted. In simplest terms, the mission statement should explain the core values that are most central and most critical
to the business. The result is a value orientation that becomes an important guide for subsequent management action.
For example, a small manufacturer included in its mission statement the phrase, "We build quality into every product we produce." The
owner wanted to convey clearly to all customers and potential customers that the business was committed to the highest level of quality
assurance. The owner emphasized the significance of this theme by including the phrase as the company motto on its business letterhead.
In making a philosophical or cultural declaration, the mission statement may say a great deal about the firm. Will the firm be a risk taker? Will it
be employee oriented? Will the firm be run according to the highest ethical standards? Will it be an aggressive competitor? Will it be a pioneer or
a follower, a me-too firm? The key is to include those items about which management feels strongly and omit those items about which it does
not. For example, the mission statement may mention nothing about a promote-from-within policy and instead discuss the strategy of hiring
young managers with new ideas.
Increasingly, owners of small and emerging businesses are recognizing that while the formulation of the company mission is ultimately their
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responsibility, the process need not be an isolated activity. In fact, the formulation of a mission rarely comes from a flash of owner insight
or inspiration. More typically, owners engage in a development process that involves input from numerous sources representing a range
of stakeholders, including suppliers, customers, and employees. Owners should recognize the significance and value of stakeholder input.
In particular, employees at all levels often have important views and help guide and foster the mission's tone and direction.
Guidelines for Mission Statements
Jones and Kahaner, in their excellent look at some of the best mission statements in the United States today, highlight a key starting rule or
guideline: Keep the statement simple. 4 Simple doesn't always mean short, but it does always mean simple. Clarity and directness must be
emphasized. Some businesses, such as Lowe's, are quite succinct. "Lowe's is in the business of providing products to help customers build,
improve, and enjoy their homes. Our goal is to out-service the competition and be our customers' 1st Choice Store for these products."5
Further, the style or tone of the writing should reflect the philosophy of the business. Look at the example of the Joy Toy Company in Figure
3.1. You really get a sense of the business through the statement and the manner in which it is communicated. In this way, the mission
communicates some of the subtle flavor of the business and its unique character.
Finally, be sure to have broad involvement in developing the mission. The mission will mean more and have a far greater motivational impact
if those in the organization feel they have had a hand in crafting it.
Figure 3.1 is a mission statement for a small toy-manufacturing company. The statement clearly lays out the nature of the firm as well as the tone
or philosophy of the company. At the same time it does not give away any proprietary secrets. Figure 3.2 provides examples of other companies'
mission statements.
In sum, the mission statement must do only two things, but it must do them well. First, it must set forth the direction of the business,
thereby specifying what the business is and what it is not. Second, it must set forth the tone or culture of the business based on the
owner's philosophy of how the business should be run.
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Joy's Toy Company produces a wide line of moderately priced educational toys for preschool and young
school-age children. We service a four-state area surrounding Missouri and sell directly to schools or
school district buying centers.
We care about children and view their education as the critical part of our task. Our toys are designed to
enrich the child's educational experience. All design work is done in-house to assure responsive, innovative
products.
Our first product priority is quality. We would rather lose a sale by being overpriced than sell low-quality
merchandise. We offer quick and accessible service and repair on all merchandise we sell.
In hiring sales representatives, we seek to attract former primary school teachers who are in tune with the
needs and wants of children and who can identify with the concerns of parents. We exclusively promote
from within.
Figure 3.1
Joy's Toy Company Mission Statement
The themes of this chapter present some important challenges for the consultant. While we have built the case for organizational change, we
have clearly noted the difficulty and resistance that is associated with such change. A consultant must recognize that most business managers
understand and accept the value of change. Indeed, enlightened managers of emerging businesses usually recognize that change is essential to
survival. They know that their business must be poised for change if they are to be successful in a dynamic competitive environment. In short, at
least at an intellectual level, they probably know and accept the necessity of change. However, the consultant must exercise care. Managers'
intellectual recognition of the value and necessity of change does not ensure their acceptance and willingness to embrace change. Often, at the
gut level change represents upheaval. Accordingly, managers are reluctant to take the steps toward change that they know make sense and are
needed. While this may appear puzzling or even illogical, it is a reality the consultant often encounters.
The seasoned consultant recognizes managers' reluctance to change and must address clients "where they are" rather than "where they should be"
or "where we would hope they would be." Therefore, the first thing a consultant must do is sense whether there is a readiness for
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Blazing Graphics
Blazing Graphics will provide you with the most effective visual communication available. We will help
you achieve all of your goals while providing you with the greatest value both seen and unseen.
Here at Blazing Graphics we take the time to do things right. We do this by controlling the entire graphic
arts process. This enables us to better coordinate each job while providing a higher level of service.
Our mission is to ensure exceptional quality by opening up communication between crafts normally
separated and at times adverse to one another.
Here at Blazing Graphics we have committed ourselves and our resources to being on the forefront of
technology.
Creative technical know-how is the single most critical determinant of economic competitiveness.
It's our belief that together we can create an environment that will be both personally and professionally
fulfilling for all the people who make up the Blazing Community.
Source: Sharon Nelton, ''Put Your Purpose in Writing," Nation's Business, 82 (February 1994), 61-64.
Cascade Properties
Cascade Properties provides services for residential and commercial real estate sales. In addition, we have
a property management firm that markets apartments, residential homes, office buildings, and commercial
complexes. We are also involved in the environmental services area.
As the real estate industry continues to change, we will aggressively explore new market opportunities and
continually educate our associates to provide outstanding service to our clients and customers.
Source: Company documents.
Celestial Seasonings
Our mission is to grow and dominate the U.S. specialty tea market by exceeding consumer expectations
eith:
The best tasting, 100 percent natural hot and iced teas, packaged with celestial art and philosophy, creating
the most valued tea experience.
Through leadership, innovation, focus, and teamwork we are dedicated to continuously improving value to
our customers, customers, employees, and stakeholders with a quality-first organization.
Source: Patricia Jones and Larry Kahaner, Say It and Live It: The 50 Corporate Mission Statements That
Hit the Mark (New York: Currency, 1995), p. 53.
Bard Optical
Bard Optical provides the latest technological advances in vision care to meet the optometric needs of the
retail consumer by providing the lowest possible price and highest quality service, while maintaining a
reasonable profit.
Source: Company documents.
Figure 3.2
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change within the business. Readiness exists when participants in a business understand that the need for change is so strong that they must
proceed along the course of change. They must understand that failure to change is an unacceptable alternative. The consultant must help
the business's leaders and managers see why change is essential. Often, looking at competitor moves and bottom-line impacts provide
persuasive evidence that change must occur. The trick is for the consultant to build the state of readiness before the business is faced with a
bottom-line crisis.
Readiness starts at the top, but it must include the bulk of the business's employees. We suggest that a critical mass of the employees should be
helped to recognize the fundamental need for change before progressing along the path of planned change. If this underlying readiness fails to
materialize, any change action is on shaky foundation. The consultant helps build the broad support needed to convince employees of the need
for change.
Of course, readiness is only part of the issue. Establishing a meaningful vision and mission is also important. Recognize the logic of the order
here. Providing a new vision and mission without a fundamental attention to readiness is risky. Even with readiness ensured, however, the
direction of changeas noted through the vision and missionmust be clear. The consultant must play a lead role here but be careful that the
evolving vision and mission come from the participants in the business. The consultant should facilitate the crafting of a vision and mission for
a business; the consultant should not create them.
To facilitate the development and crafting of the mission statement, the consultant should try to guide the company's managers to critically
evaluate the business from an external or outside perspective. Rather than using an internal focus (considering what types of products/services
the company offers), the consultant should encourage managers to focus on who the customer is, the types of needs the company satisfies, and
how the company satisfies those needs. By focusing on these three areas, the consultant can ensure that the company will be using an external
perspective to develop its mission statement. Too often a company will define its business simply by the products/services it offers. This
internal approach usually provides too narrow a definition for the mission statement.
Finally, the consultant should be prepared to allow considerable time for the final mission statement to evolve. It may take several iterations
before the company is satisfied with the semantics of its mission statement. It can become a tedious process in which each word is analyzed
and critiqued. This is perfectly acceptable. It is critical that the company is sat-
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isfied with each word because others will use the mission statement to guide them in developing future strategic plans.
1. Why is the process of change so difficult for emerging small businesses?
2. What are some of the attitudes and actions that managers of emerging businesses can encourage to build a climate of creativity and innovation?
3. Why is the mission statement so important for emerging small businesses?
4. What are the parts of the mission statement?
5. Is it easy to identify a company's management philosophy? Can you gain a sense of it by visiting the business? Could you determine
the philosophy by interviewing some of the key managers of the business?
6. Select an emerging small business in your community and obtain a copy of its mission statement. Does it portray the information that has
been noted in this chapter?
Notes
1. Gary Fallesen, "Women's Point of View," www.rochesterdandc.com/rec/biking/rb7087a.html, accessed May 28, 1997.
2. Warren Bennis and Burt Nanus, Leaders: The Strategies for Taking Charge (New York: Harper & Row, 1985), p. 76.
3. Kara Swisher, "The Two Grown-Ups Behind Yahoo!'s Surge," The Wall Street Journal, April 10, 1998, B1, B5.
4. Patricia Jones and Larry Kahaner, Say It and Live It: The 50 Corporate Mission Statements That Hit the Mark (New York: Currency, 1995),
pp. 263-67.
5. Ibid., p. 157.
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Chapter 4
General Environment
New and emerging businesses are affected by the environment in which they operate. Such factors as economic conditions, government
regulation, changing customer buying behavior, technological enhancements, and competition may impact business performance. As an
important step in the planning process, environmental analyses are performed to identify and assess external factors that can potentially impact
the future of an organization. After reading this chapter you should be able to
• understand the significance of external analysis;
• recognize why managers of emerging firms must be proactive;
• realize the importance of establishing an external frame of reference for strategic planning; and
• identify the impact of general environmental factors on industry performance.
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The Value of Environmental Analysis
Planning in today's dynamic environment may be the single most significant factor affecting a company's success or failure. New and
emerging businesses must be particularly sensitive to environmental influences for three important reasons.
First, an emerging firm's responsiveness to environmental issues may be a source of considerable competitive strength. A new or emerging
business can stay closer to the consumer than larger businesses can. By virtue of its smaller size, an emerging firm can move with speed,
flexibility, and sensitivity to accommodate shifts in customer preferences. Larger, more structured, and hierarchically bound organizations may
be unable to alter their direction or focus quickly. Consequently, a new or emerging business may be able to etch out a competitive edge
against large firms.
Second, emerging businesses are particularly vulnerable to environmental influences. They cannot afford to misread their environment.
Although one mistake or one misreading of a critical environmental trend may affect a large firm adversely, the error can usually be easily
absorbed into the breadth of its total operations. However, a similar mistake may destroy a small business. Rare is the small business
whose resources can withstand such mistakes.
Third, emerging firms usually don't have the resources needed to alter their environment; rather, they must respond to environmental
changes. Therefore, it is imperative that managers of emerging firms understand what is currently happening in its environment. In addition,
they must understand how that environment is changing, thus making it necessary for them to recognize the major drivers that will affect the
future of the industry.
Industry drivers are factors that shape the future of an industry in terms of both demand and competition. Managers of successful firms, large
or small, have a good understanding of what drives their industries. For example, is the industry driven by government regulation? Is it driven
by technological change? Is it driven by increasing needs for quality products? Is it driven by the imperative to control costs and offer products
at lower prices? Is the industry affected by changing demographics? Obviously, there can be many environmental drivers. It is therefore
necessary for successful managers to be able to identify key drivers in their respective industries.
The three reasons noted abovethe benefits of small size, vulnerability to competition, and the need to identify changes in the industry
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underscore the need for environmental analysis. A thorough environmental analysis is the difference between a proactive and reactive business.
Proactive Management
One of the themes of this book is that planning stems from a proactive perspective. Simply stated, proactive managers look to the future
and anticipate and plan for change. One reason for emphasizing environmental analysis so strongly is that it helps the business develop a
proactive rather than reactive style of management. Proactive managers see opportunities on the horizon and position the business to benefit
from them. They also recognize impending threats and take actions to overcome them before disaster strikes.
A reactive business, however, is driven by day-to-day demands: Events occur and the firm responds. A reactive business is always undergoing a
new, usually unanticipated trauma. Crisis management is the evolving style of operation and putting out the largest fire is the focus of activities.
In all likelihood, the business that fails to recognize and analyze its environment will become the victim of changes and forces within that
environment. The literature on small business failures is filled with examples.
An example of proactive thinking is featured in Profile 4.1. Andrew and Thomas Parkinson took advantage of two significant
environmental trendsthe increasing use of home computers featuring online services and the decrease in leisure time among contemporary
families. They capitalized on both trends to provide a service for those whose time is perhaps more precious than money.
The Nature of Environmental Analysis
A company's environment establishes the context within which the company functions. The environment contains a set of factors that affect
the business and its performance but that are external to and largely beyond its control. When managers perform an environmental analysis,
they identify and examine key external factors and assess and evaluate the impact these factors will likely have on a firm's operations and suc-
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Profile 4.1
Peapod, Inc.
In select Jewel Food Stores in Chicago and Safeway, Inc., stores in San Francisco, some people are
shopping carefully even though not for themselves. They are employees of Peapod, Inc., a computerized
shopping service. Founders Andrew and Thomas Parkinson have made the idea of grocery shopping via
computer a reality for over 7,000 customers.
Peapod's customers use their home computers to "shop" for groceries. They are able to select specific
brands, compare prices, browse electronic "aisles," such as cereal and breakfast or ethnic foods, to get
ideas, and even use coupons. The software, which is the key to the operation, also allows customers to
maintain grocery lists and indicate acceptable substitutes if the store is out of stock on a particular item.
The orders are then transmitted via computer, telephone, or fax to Peapod's professional shoppers. The
shoppers gather the groceries, which are delivered within a 90-minute window. Customers can pay by
check, credit card, or computer account. Customers subscribe to the service either on a flat rate or per-
usage basis.
Sales in 1997 increased by 104 percent to $29.2 million, and Peapod plans to introduce a new generation
of online shopping software in 1998. All of this is possible because two entrepreneurs found a way to
combine technology with one of the most mundane of all tasksshopping for groceries.
Source: www.peapod.com, accessed May 22, 1998.
cess. Managers analyze present forces and also attempt to project trends and anticipate changes. Environmental analysis is future
orientedmanagers seek to determine what problems and opportunities will likely be created by changes in the environment.
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Figure 4.1
The process of analyzing the environment is illustrated schematically in Figure 4.1. The broadest set of variables comprise those technological,
political/legal, social, demographic, economic, and global variables that may affect the business in only a general way. These variables make up
the general or macroenvironment. A somewhat narrower set of variables that may have a more specific impact make up the industry
environment. All of these variables tell us something about the dynamics of the industry and the players within it.
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Analyzing the General Environment
In this chapter we restrict the firm's external analysis to the macroenvironment; industry and competitive factors are discussed in Chapter 5.
The general or macroenvironment comprises variables that are not company or industry specific but apply to and affect all firms, although
their impact may be felt differently by each firm. Six areas of macroenvironmental variables need to be considered: technological changes,
political and legal changes, social changes, demographic changes, economic changes, and global changes.
Technological Changes
The presence and continued proliferation of computerized information is revolutionizing products, processes, and communications. Companies
can now use flexible manufacturing systems to make customized products while simultaneously minimizing costs. Information management is
becoming a source of competitive advantage in many industries. It was estimated that in 1997 there were 50 million Internet users worldwide
and major service providers reported an average annual growth rate of 150 percent.
New technical processes are rapidly emerging and changing the nature and focus of organizational action. Key technological changes affecting
a business and its industry should always be tracked. By following developments reported in trade literature, searching the Internet, and
following reports of advances noted by suppliers or sales representatives, business managers may be reasonably aware of these key changes.
Failure to monitor and address major technological innovations may adversely affect a firm's competitive position, particularly if competing
firms use technical improvements.
Adopting technical improvements does not, of course, mean that every fad or innovation must be accepted. Rather, a careful analysis and
systematic consideration of each advance is necessary to determine the potential effect on the firm, thus allowing the best and most relevant
changes to be exploited. Further, a manager may avoid being caught in a position where customers perceive the business as being
technologically backward or inferior to its competitors. If this occurs, a significant number of customers may be lost, and the business may be
forced to incur substantial expense to bring its technology up-to-date and online.
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A few years ago, an insightful middle-aged man started his own graphic design business. He had extensive experience in the industry, having
been employed by his largest competitor for 14 years. Through his experience and exposure to the industry and his careful analysis of evolving
trends, he concluded that all six firms in his selected target market were using outdated equipment and approaches. He felt that his business, by
availing itself of the latest technological advances, could offer customers better quality at lower prices, thus attaining a competitive edge. He
obviously was right. Today, all of his competitors are using cutting edge software and other technology. The entrepreneur had gained a
competitive edge by recognizing the trend and was able to capitalize on that edge for a period of time, which allowed him to gain a foothold in
the market in spite of substantial competition.
Political and Legal Changes
Factors such as changes in government policy and regulations, legal developments, and changes in political philosophy may all affect a
business. These changes can occur at the federal, state, and local level. It is not unusual for social pressures to prompt enactment of
legislative guidelines and requirements that affect small business operations. For example, attempts to change health care policy may have a
dramatic effect on both emerging companies' opportunities and their ability to compete.
From time to time, tax laws change, with resulting effects on the structure and reporting practices of new or emerging businesses. Political
pressures within a particular community or trade area may affect not only the general business climate but also philosophies toward the promotion
of new and emerging businesses. Managers must address these and any number of other political/legal concerns.
Pending judicial decisions that may impact a business should also be monitored closely. For example, deregulation in the airline, trucking,
and banking industries has created tremendous growth opportunities for some emerging businesses while threatening the future success of
others. Recent deregulation of the utility industry will no doubt create the opportunity for emerging businesses to compete in markets that had
been previously reserved for only very large organizations.
Local newspapers, chamber of commerce reports, trade publications, and general business publications (such as Business Week and The Wall
Street Journal) are important informational sources. Even more current
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information can be found through the many sources available on the Internet. Some computer users make a habit of checking the latest
developments each morning. By reading and staying up-to-date on current and impending developments, managers can maintain a
reasonably accurate appraisal of political and legal trends and gain enough information to seek out appropriate professionals for more
specific guidance when necessary.
Social Changes
Social factors are identified as the general attitudes, preferences, tastes, and beliefs of a society. Two of the most visible social changes in the
past couple of decades are health consciousness and environmentalism, two social trends that have influenced numerous industries. The fast-
food industry, for example, has responded to health consciousness by offering healthier alternatives such as low-fat sandwiches and salads and
has responded to environmentalists by packaging food in biodegradable materials rather than Styrofoam.
Even though social changes have threatened some industries, they have virtually created new industries. With an increase in overall health
consciousness, demand for access to a local businessman's small health club increased. The businessman expanded his hours and shortly
thereafter expanded his facilities to meet increasing demand. Realizing that his health-conscious patrons were just as concerned with
maintaining a healthy diet as they were with exercise, he began to sell a limited line of health food snacks at his club and demand grew
considerably. Nonmembers of the club asked if they too could purchase the health food items, citing that his selection was better than that of
any of the local grocery stores. Ultimately, he decided to open his own health food store. Rather than focusing on vitamins and supplements,
his product line was similar to a traditional grocery store, although his products were all natural. He sold everything from organic milk (milk
processed from cows that were not given the bovine growth hormone) to high-fiber pastas. By responding to the social trend of health
consciousness, revenues from his all-natural grocery store quickly surpassed revenues from his health club.
As another example, a store catering to runners carried only running shoes 15 years ago and targeted hard-core, serious runners. However,
changing social values have twice forced the store to change. Beginning in the mid-1980s, large numbers of people turned to running; and it
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became an activity not limited by gender or age. As running has gained in popularity, consumer demand has expanded beyond shoes to include
running gear, books, and accessories. As baby boomers age, some runners, and many others who had never exercised at all, have taken up
walking, thus providing an additional market for the store. By tracking these changes and anticipating their effects, the store owners were able to
continue to expand the business.
One may argue that logically any business would do this. Any store concentrating only on top-of-the-line shoes would be forced to change
because of consumer demand. That may be true, but it is not the key point. If a shoe firm's managers are blind to evolving changes in their
industry and maintain a strict reliance on one kind of shoe alone, other entrepreneurs will soon enter the market and fill the gap. On the other hand,
if managers monitor the environment, they can anticipate these changes and modify and expand their offerings. Then the business reduces the
threat of potential competition and capitalizes on an opportunity for expanding its product line and increasing its sales volume.
Demographic Changes
Demographic factors are trends in population characteristics such as age, ethnic makeup, education, family composition, and gender distribution.
The U.S. Census Bureau gathers and reports these data. Changes in demographic factors can have a significant impact on an emerging business,
particularly if they indicate developing trends. Changes can affect either demand for a company's products or a company's ability to hire
employees.
Demand Issues
Consider the example of a local Italian restaurant that has experienced multiple shifts in its business over the past 20 years. The owners have
always provided good food in a friendly atmosphere, with a fairly broad and diverse menu of Italian food. The business is noted for
personalized service by friendly waiters and waitresses. Most important, the owners stress ''home cooking." When an order is placed, the cooks
(who are also the owners) prepare each entree with that "special touch." The business, which has existed on the same corner for more than 20
years, prospered for a number of years but then found itself facing a tough market. However, after a rocky period when survival was
questionable, business is again brisk and the future looks promising.
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Although many factors may help explain the performance of the restaurant through the years, demographic factors should be considered. During
the 1970s and 1980s, the United States experienced a critical shift in the dining-out experience, much of it a result of the demographic shift in
changing family structures. First, there were more two-career families, which explained the desire for eating out. But the attitude toward, and
function of, dining out had also changed. Time was critical, and families seemed to want to eat more quickly. They desired less of a "dining
experience" than a functional activity. Quickly filled orders were seen as reasonable trade-offs for limited menus with few or no frills. The
Italian restaurant did not respond to these needs and therefore lost ground to more "in-touch" competitors.
Today, however, maturing baby boomers are increasingly looking for upscale, casual dining. Restaurants with quality menus are reaping the
benefits as many consumers reject fast food. In particular, specialty niches, such as Italian food, appear quite popular. The restaurant described
here is capitalizing on this popularity, as its specialties are again consistent with consumer desires.
Another example is the spectacular growth of services aimed at the needs of working women. Currently, the majority of married women
are working. At the same time, there is tremendous growth in single-parent households. These changes provide new opportunities for
creative businesses. As work-family conflicts have surfaced and moved to the social forefront, approaches for addressing and reducing
those conflicts are begging for attention. In many cases, well-attuned small business owners are etching out new competitive niches. For
example, KangaKab is a shuttle service that transports preschoolers to and from day care centers, filling in for parents whose hectic
schedules prohibit the more traditional mom or dad shuttle. 1
One more example illustrates how demand for products or services changes as demographics change. With the U.S. population aging, many
opportunities are arising for entrepreneurs and emerging businesses. The demand for assisted-living facilities, for instance, is projected to grow
at a rate of 30,000 beds a year. Senior citizens today are living far longer than earlier generations did; in fact, the single fastest growing age
group is people over 100 years old! While large public companies will undoubtedly attempt to meet part of this demand, new and emerging
businesses will have ample opportunity to carve out special niches and succeed. Some observers are suggesting that small businesses that
operate hotel-like housing
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for older people will prosper. Other businesses may focus on seniors with special needs, ranging from those who simply need help with
household chores and shopping to those with Alzheimer's disease. 2
Labor Issues
While demographics affect the demand for products and services, they also affect the ability of companies to hire qualified workers. For
example, one source of opportunity for teenage workers has always been the fast-food industry. This industry, often noted for less than
desirable working conditions, has traditionally hired many teenagers who could not find work elsewhere. Today, however, virtually every fast-
food restaurant in the country has Now Hiring signs in the window or on the marquee. Why? It's simply because fewer teenagers are available.
This, coupled with a booming economy in the late 1990s, provides better opportunities for teenagers looking for work. Thus, fast-food
restaurants have had to turn to an interesting but growing workforcesenior citizens.
During the 1990s, many businesses turned to temporary workers to cut the cost of fulltime employees and give themselves flexibility in staffing.
As the unemployment rate continues to fall, however, the pool of temporary workers nationwide is shrinking. The low supply of temporary
workers is stifling the growth of some emerging businesses, particularly in the communications and software areas. Some observers even note
that the crunch among temporaries may be part of a national staffing crisis.3
Clearly, the availability of skilled workers affects the emerging business. In fact, growth plans may have to be tempered if needed talent can't
be found. Further, as the demand for labor increases and the supply of labor decreases, wages are often bid up. This, too, can significantly affect
the growth actions of the emerging business. As you can see, the labor issue, which may become more threatening in the next decade or so as
baby boomers begin to reach retirement age, can have pervasive effects.
Economic Changes
Economic projections or forecasts are important because of the lag time between economic changes and their effect on business forces and
consumer decisions. Generally, macroeconomic information (at the national or state level) is readily available, although these data may be of
little real value to emerging businesses dealing in unique and more iso-
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lated markets. Awareness of economic factors within the relevant target market therefore becomes critical. For example, business managers are
concerned about factors such as movements or trends in local interest rates, unemployment levels, total sales within the community, tax rates,
and availability of capital. Of course, the influence of these factors will vary considerably across firms and industries. If an emerging business is
involved in consumer goods, changes in the level of disposable income also becomes an important concern.
Global Changes
Global changes offer tremendous opportunities and potential threats for emerging businesses. Numerous emerging and high-growth businesses
have realized significant benefits by either selling their products or services in foreign countries or importing raw materials in order to offer their
products or services in a cost-effective manner. The importance of assessing global markets has become increasingly important as a result of the
development of satellite communication, cheaper and faster modes of transportation, the privatization of several overseas regions, and the
emergence of economic alliances among countries.
The passage of the North American Free Trade Agreement (NAFTA) provides a significant opportunity for those U.S.-based emerging companies
that can take advantage of more favorable export/import conditions with Canada and Mexico. Even before its passage, many emerging companies
were keenly aware of the provisions of NAFTA and recognized its potential effects. In many cases, managers of these companies were planning
the development and restructuring of their firms to avail themselves of the trade opportunities that NAFTA offered.
While foreign markets may provide many opportunities for emerging businesses, they may also expose firms to new risks. One potential risk is
loss of domestic market share as a result of the emergence of foreign competition. Examples of U.S. industries that have suffered from foreign
competition include automobiles, steel, and personal computers. Other detriments associated with global factors include the basic risks of
doing business across national boundaries, such as fluctuations in currency exchange rates, political risk, and cultural differences.
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We often hear of "lucky" companies or businesses. At some point, all businesses will experience lucksome good and some bad. A consultant
should be cognizant that while some "successful" businesses may occasionally experience blind luck, so-called lucky firms are actually
benefiting from a conscious effort by their managers to understand their external environment. There is little luck in business successsuccess
usually occurs when preparedness meets opportunity, not through luck.
External Focus
Strategic planning is an externally driven process. Monitoring the external environment signals what a firm does well and where it needs to
improve. Rather than first analyzing a firm and then analyzing its environment, an effective consultant will initially understand the firm's
external environment. Understanding general environmental factors helps in forecasting future industry trends and directions along with helping
to assess opportunities and threats in the industry. Understanding the environment must precede a constructive assessment of internal operations.
In short, only after a complete external analysis is finished should a consultant begin to assess the firm's internal operations.
Driving Forces
Driving forces are major factors that influence the future direction of an industry. A comprehensive analysis of an industry can yield an array of
factors that may lead to future industry trends. However, only the most important of these factors will become driving forces for industry change.
Two types of industry drivers exist: demand drivers and competitive drivers. Demand drivers are factors that affect future demand in the industry.
For example, as we discussed earlier in this chapter, increasing health consciousness has created tremendous opportunities in health-related
businesses. Health consciousness is therefore the demand driver. This same social characteristichealth consciousnesshas had a substantial negative
effect on demand in other industries. Consider the cigarette industry. For decades smoking was considered the norm. As a result
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of increasing concern with health consciousness, not only are we smoking fewer cigarettes, but most public places are now designated
as nonsmoking areas, and California is a nonsmoking state. Clearly, increases in health consciousness have decreased demand in the
cigarette industry. 4
Competitive drivers, the second type of industry driver, affect how companies within an industry compete. Take, for example, the stock
brokerage industry. Until deregulation of the banking industry in 1987, stockbrokers competed only against other stockbrokers. Following
banking industry deregulation, banks were allowed to sell stocks, which completely changed the nature of competition in the brokerage
industry. More recently, technological developments providing Internet privacy through encryption programs have allowed discount brokers
to change the nature of competition in the industry again by operating on the Internet.
The ultimate goal of an effective external analysis is to identify the major underlying drivers for the industry. The key word when identifying
drivers is "major." Quite often analysts will use a "shotgun approach" in an attempt to cover any possible drivers. Some drivers may be
extremely important to determining the future of the industry but others may have minimal impact. A good rule of thumb is to identify no more
than three demand drivers and three competitive drivers. Limiting the number of drivers forces a consultant to critically compare and contrast
the relative importance of each one.
1. Why is it critical for a manager to take a proactive stance in today's business world?
2. How do you determine if a current trend is an industry driver?
3. Explain briefly which general environment information is most relevant for the following:
a. shoe repair shop
b. car dealer
c. liquor store
d. computer software company
e. manufacturer of tool and die equipment
4. Why is it important to perform an external analysis before proceeding with an internal analysis?
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Notes
1. Michael Selz, "Enterprise: From School to the Doctor's Office to Home; Ride Service Does the Driving for Parents," The Wall Street
Journal, May 6, 1994, B1.
2. Michael Selz, "Value Based Companies Are Fetching Higher Prices," The Wall Street Journal, May 19, 1998, B2.
3. Linda Davidson, "The Temp Pool's Shrinking," Workforce (April, 1997): 72-80.
4. Lloyd Byars, Leslie Rue, and Shakar Zahra, Strategic Management (Chicago: Irwin, 1996).
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Chapter 5
Industry Environment
Whereas Chapter 4 discussed the general or macroenvironment, this chapter focuses on the industry and competitive environment. Industry
and competitive factors may indicate whether an industry is growing or declining, who the major competitors are, what important supplier
links exist, and issues regarding the labor force. When you finish reading this chapter, you should be able to
• explain the influence of competition on an industry;
• identify sources of external information;
• determine which information should be monitored carefully and which should be only casually assessed;
• understand methods of collecting and analyzing data; and
• recognize how to use competitive information.
Once the macroenvironment has been sufficiently examined, analysis should turn to the industry. Five factors should be addressed: the general
nature of the industry, its growth rate, dynamics of the competition, characteristics of consumers, and dependence on suppliers.
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Nature of the Industry
Owners and managers must consider whether such things as technology, product quality, distribution channels, and product obsolescence are
changing in their industry. Understanding the nature of the industry gives the manager of an emerging business a feel for how successful
particular strategies may be. Is the industry constantly updating and using state-of-the-art equipment, or does it rely on existing equipment? Do
customers in the industry demand high-quality products and service, or are they willing to accept whatever is produced? Is the industry in a
product market or a service market? Is the industry part of the consumer market or does it sell its products to intermediary firms? Are products
manufactured totally within a single company or do subcontractors make components?
Incremental Versus Radical Changes
Industries generally change slowly. Incremental changes, of which numerous examples exist, are based on improvements to existing knowledge
or technology. Consider the computer hardware and software industries. Intel has made several improvements to the speed of its processors,
including the 8088, 286, 386, 486, Pentium, and Pentium II; and Microsoft has been successful with incremental improvements in its Windows
3.1, Windows 3.11, Windows 95, and Windows 98.
Occasionally, an industry will experience a radical change, but radical changes are rare. When they do occur, however, they usually
completely replace the need for existing products. The quartz watch completely replaced windup watches. Word processors have replaced
typewriters. Advances in the Internet are replacing the need for many traditional marketing mediums. Many people today don't remember
the mimeograph machines that were made obsolete by photocopiers. Mom and pop grocery stores essentially no longer exist. And while an
effective manager should be able to anticipate incremental industry changes, radical changes are far more difficult to predict.
Industry Growth Rate
A firm competing in a high-growth market has far different opportunities and constraints than one that competes in a mature or declining
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market. In a growth environment, errors and inefficiencies can be tolerated. In a low-growth market with limited profits, errors can be fatal.
The concept of product life cycle may be a useful analytical tool in examining an industry's growth rate. Typically, as noted in Figure 5.1,
products are seen as passing through four distinct developmental stages. The stage a product is in in this continuum can critically affect the
business because each stage is accompanied by a unique series of opportunities and difficulties. For example, if a company's products are in the
latter stages of the cycle (late maturity or decline), significant future problems may arise. This is particularly true if attractive alternative products
are being offered by competitors and the business does not possess a strong market share. Managers may need to search for new products or
reposition the business to deal with this threat.
Managers must also understand how long it will take for products to move through the stages of the life cycle. Products may be approaching
maturity, but if this stage is seen as lasting for a lengthy period, the impetus for immediate action is lessened. Similarly, relying too heavily
on a product caught for too long in the introduction stage may adversely affect sales. Many factors, including the availability of substitutes
and shifts in consumer tastes and preferences, will affect the rapidity of movement through the product stages. Failing to understand the
level and extent of demand can produce harsh consequences. Identifying the current lifecycle position correctly and enacting a strategy
consistent with these
readings can be important factors of success.
Figure 5.1
Stages in Product Life Cycle
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The strategic impact of shifting life-cycle stages is demonstrated in Profile 5.1. Fitness, as a social trend, certainly was a theme that captured
the 1980s and fueled the growth of related industries. But the obsession with fitness reached its peak by the latter part of the 1980s and began
to decline. In fact, recent statistics indicate that overall participation in exercise and strenuous activity is declining. 1 The decline seems to be
across all age groups and therefore does not appear to be the result of an aging population. Americans seem to be moderating their exercise
programs and focusing on relatively less strenuous activities like walking, swimming, and biking. Manufacturers in fitness and related
industries must realize they are likely to experience rapid life cycles. Typically, these product areas experience accelerated growth, early
maturity, and speedy declines as fickle consumers change attitudes, interests, and leisure lifestyles at a dizzying pace. Rowing machines,
aerobic videos, and perhaps even jogging accessories have felt the consequences of consumer fickleness.
The nature of industry capacity must also be addressed. If demand is strong but industry capacity limited, businesses can take risks and
exercise considerable flexibility. However, as industry capacity increases relative to demand, operational efficiency and cost control become
critical, and weaker firms are likely to be driven out of markets.
Competitive Rivalry2
One of the most critical parts of environmental analysis deals with competitive assessment. In many regards, the competition is the most
visible, commonly perceived threat an emerging business faces. For example, do the firms in the industry compete only indirectly and
coexist peacefully, or do they compete aggressively and attempt to drive each other from the marketplace? Is the competition price based,
quality based, service based, or a combination of all three?
Included in the dynamics of the competition is the relative size and market share. Some industries may be dominated by two or three
major competitors. Competing in such markets is extremely difficult for smaller companies. Other industries are highly fragmented with
no dominant players. Still others may have a few national firms along with a number of small niche firms, such as the restaurant industry
where national chains
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Profile 5.1
New Balance Athletic Shoe, Inc

In 1972 Jim Davis paid $100,000 to buy New Balance Athletic Shoe, Inc. This small, sleepy shoe
manufacturer had been in existence for more than 60 years and had been making athletic shoes for about 10
years. Davis's purchase coincided perfectly with market demands, as the fitness and running movements
were poised to explode on the American scene. As physical fitness became a national obsession during the
1980s, the athletic footwear business experienced annual growth rates as high as 20 percent. Typical of an
industry with rocketing growth, new manufacturers emerged to meet the demand.
With the market soaring, Davis's strategy during the early years was quite basicmanufacture a quality
product and get it into the hands of anxious buyers. New Balance, like many small businesses in this
industry, pursued a follower strategy. Industry leaders Nike and Reebok dictated product movements and
New Balance mirrored their actions. Unfortunately, New Balance followed the leaders as they expanded
into an ever-growing range of product areas. This splintering of manufacturing focus consistently left New
Balance with insufficient levels of product in its traditionally strong running shoe market. In addition, the
company suffered from low brand awareness, and few advertising dollars were available to enhance that
awareness. Not surprisingly, from 1986 to 1989 the company saw growth leveling off despite continued
surges in the industry.
By the early 1990s the athletic footwear industry began to contract as sales dipped industrywide. Analysts
posited a number of possible explanations. Perhaps the impact of the domestic economy's recession was
being felt. Perhaps the market was saturated. Perhaps consumer interests and preferences were shifting.
Whatever explanation was accepted, one outcome seemed apparent: An industry shakeout was likely, and
survival of all existing brand name manufacturers appeared doubtful.
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Clearly, New Balance's existence depended on some very careful strategic thinking. Davis's response was
to build on the business's traditional strengths and focus on a few tactical approaches that could be
competitive advantagesa strategy Davis called Operation Quick Strike. Operation Quick Strike contained
many planks, but certain themes were central. First, New Balance created a niche in an intensively
competitive industry by focusing on width sizing. While other running shoe manufacturers offered few
widths, New Balance offered ranges on some shoes from AA to EEE. Although width sizing was difficult
and expensive, it enabled New Balance to develop an image as a customized manufacturer. Strong
production control and just-in-time retailing supported the focus on customized quality. In addition, New
Balance expanded its line with great care. Reading demographic and social trends carefully, New Balance
surmised that baby boomers were in the process of switching from running to exercise walking.
Accordingly, a line of walking shoes became an attractive addition to the business. Operation Quick Strike
strategy also focused on increased advertising aimed at carefully selected targets that were most consistent
with the themes the company wished to stress. With a growing reputation for producing quality shoes that
fit better than the competition's and by selectively gearing efforts toward emerging hot segments of the
market, New Balance seems positioned to be one of the more successful niche players in the highly
competitive athletic footwear industry.
Today, Jim Davis still owns New Balance, but the company that has emerged includes nine vice presidents
covering areas such as marketing, manufacturing, finance, and global operations. Five plants are divided
between Maine and Massachusetts, and in addition to sports apparel, they make shoes for eight sports in
sizes from infants' size 2 to men's size 18 in widths from 2A to 4E.
Source: Jay Finegan, ''Surviving in the Nike/Reebok Jungle (New Balance Athletic Shoe, Inc.)," Inc., May
1993, V15 #5, pp. 98-102; and www.newbalance.com, accessed May 15, 1998.
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compete along with locally owned restaurants. What is the role of franchises in the industry being considered? Independent businesses often have
a difficult time competing with franchised units because of the substantial name recognition and support provided by a national firm.
Recognizing and identifying competitors is no simple task. Competitors may take new forms as markets evolve and change. Customers' needs
shift and are always being met in new and unique ways. Traditional businesses may encounter new types of competition that were not even
considered in the past. Clearly, a successful new or emerging business must be attuned to the changing face of competition. For example,
management must consider the entry and impact of new competition in the industry. Who are these competitors? How will they affect or modify
the existing structure and balance of the industry? What happens when an industry dominated by small independents must react to the entry of
large national chains or franchises? In the latter situation, the independents must recognize that the entire composition of the industry has been
radically affected and must make necessary adjustments.
Consider the case of Edwards Service Station, a full-service gas station started in 1970 by Curt Edwards. A superb mechanic, Curt, along with his
brother and one part-time worker, transformed the single bay, neighborhood station from a fledgling start-up to a financially thriving and well-
respected operation in its first decade of existence. When Curt's son Mike joined the business in 1980, full-service stations were still dominant.
Over the next decade, however, the complexion of the industry changed dramatically. The American quest for speed and specialized service began
to appear in new competitive forms. Specialized muffler and brake franchises began to drain business by offering a price structure that Curt
couldn't match. Similarly, specialty oil change and lube franchises offered speed, price, and convenience options that Curt was unable to
duplicate. Curt largely discounted the impact of this new competition. He knew what a service station was supposed to be, and he was sure his
customers would remain loyal because of the personal attention to detail that he had always provided.
But by the early 1990s Curt was fighting a losing battle. Nationally, full-service stations were in rapid decline and accounted for only about
35 percent of the total stations in the country. Mike encouraged Curt to convert to a one-stop convenience center, emphasizing convenience
store items and self-service gasoline. Not surprisingly, Curt rebelled. With true professional pride, he argued that there would always be a
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place for the traditional service station. By the mid-1990s, Edwards Service Station was losing money, and Curt was dipping into the savings he
had set aside for his retirement. In late 1996, as Edwards closed, many observers commented that its owners had been driven out of business by
a new set of competitive threats.
Initially, managers should determine the number of competing firms and their market share in the trade area. Although a precise determination
of market share may not be possible, collecting sales data of competing firms may provide a general understanding of relative market share.
These data may be difficult to obtain, but simply looking in the Yellow Pages of a local telephone book or visiting the chamber of commerce
should at least indicate the number of competitors. It is also important to assess the strengths, weaknesses, and unique competencies of
competitors in addition to strategies they seem likely to use in the future. One of the best ways to assess competitors and compare their strengths
and weaknesses with one's own firm is to use a competitive analysis profile, which indicates the key factors that affect the firm's success and
compares competing firms' status vis-à-vis each factor. The factors chosen for consideration may vary, but the 15 factors listed in Figure 5.2 are
typical. The comparison or rating need not be extensive or particularly sophisticated, but the analysis profile provides a clear snapshot of where
each firm stands in terms of the 15 factors. Such awareness allows managers to recognize threats and opportunities and then act to deal with
them. Consider, for example, the case of Harley's Hardware in Profile 5.2.
Characteristics of Customers
Another area of analysis is the customer target marketthat specific set of individuals a business chooses to attract as its primary customers. A
clear recognition of the needs, concerns, and makeup of this group is critical because marketing and promotion are designed to appeal to a
target market. Products and services are not ends in and of themselves. Many small business owners forget this and become so enamored with
their products or services that they fail to understand or see the customer's perspective. Products or services, no matter how well conceived
and developed, will only be successful if they meet some consumer need. Shifts in consumer tastes and preferences must be constantly
monitored. Under-
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Figure 5.2
Competitive Analysis Profile
standing the demographic and social makeup of the target marketspecifically its distribution according to sex, age, marital status, income,
occupation, and lifestylehelps identify its needs and concerns. Shifts in target markets often offer new opportunities for a business; for
example, a restaurant located in an aging neighborhood may consider modifying menu items or offering senior citizen discounts to
increase business.
In addition, managers of emerging businesses must try to identify specific factors that impact consumers' purchasing decisions for their
particular product or service. Is the consumer more concerned with price,
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Profile 5.2
Harley's Hardware
In 1975 Harley Alexander founded Harley's Hardware, a small, full-service hardware business
with 15 employees in nine departments, that is known for its friendliness. Harley hired a
consultant in 1995 to address the increasing number of large do-it-yourself home centers such as
Lowe's and Builder's Square that were moving into the city. In exploring Harley's external
situation, the consultant relied heavily on existing data sources. For example, recent secondary
data from the U.S. Census Bureau, Survey of Buying Power, Standard and Poor's Industry
Surveys, Hardware Age magazine, and the National Retail Hardware Association provided a
wealth of information. Locally, each key competitor was identified, analyzed, and compared on a
series of competitive factors.
Of the many competitors in Harley's trade area, six are dominant and pose the strongest threat to
Harley. A detailed competitive profile for each of these competitors, with their strengths and
weaknesses, is shown below. The table gives each competitor an overall performance indexa
measure of how strong each is perceived to bebased on a total point index of 125. The
characteristics chosen were selected because of their relevance to shoppers at hardware stores.
Scale from 1 to 5: 1 (very poor); 2 (below average); 3 (average);

4 (above average); 5 (outstanding)
(table continued on next page)
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(table continued from previous page)

quality, service, availability, or reputation? A good understanding of the specific factors that drive consumers' purchasing decisions will allow
an emerging small business to be more responsive to consumer needs.
In some cases, successful companies have been able to differentiate their product or service so convincingly that customers are totally dependent
on the business. Customers perceive that such a product or service is unique and they can only purchase it from a specific company. For
example, many avid golfers are convinced that they need the Big Bertha
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driver, which is produced only by Callaway. This gives Callaway great flexibility in both price and delivery.
Finally, managers of emerging businesses should assess whether any barriers to entry existthat is, factors that discourage new companies from
entering an industry. Tangible entry barriers may include capital requirements, access to information and/or distribution channels, and
ownership of specific assets such as plant and equipment. Intangible entry barriers may include brand name recognition, customer loyalty, and
company reputation. The combined impact of these entry barriers reduces the potential threat of new firms' entry into the market.
Suppliers
Because it is important for a manager to keep abreast of suppliers and the factors affecting their success, a manager must consider the firm's
relationship to suppliers in light of two factorsdependency and vulnerability. Each business will differ, often considerably, in terms of these two
factors. Dependency refers to the extent to which a business depends on or requires extensive raw materials or subassemblies provided by
suppliers. Some businesses are fairly self-contained and self-supporting, thereby exhibiting little dependency, whereas others are almost totally
dependent on their suppliers.
Vulnerability refers to the extent to which a business would be affected by breakdowns in the supply network. Typically, business vulnerability
is determined by the number of competing suppliers who could provide items for the business and the track record of these suppliers. In general,
the fewer sources of supply, the more vulnerable the business is to the arbitrary actions of the existing suppliers.
Sometimes dependency and vulnerability issues surface over key customers rather then key suppliers. If, for example, a business is a captive
supplier of a larger firmthat is, it sells nearly all of its products or services to one customerthen the small business is extremely vulnerable when the
larger firm encounters a strike or significant downturn. In most cases the larger firm survives the trauma, but the smaller, dependent firm may not.
In considering high dependency and/or vulnerability, it is critical to be aware of forces that may affect the availability of raw materials or
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other components as well as their price and delivery. For example, a small company that sold fine chocolates established an extensive demand for
its candies through astute marketing to local businesses, restaurants, and hotels. The profitability of the firm, and indeed its survival, was
threatened, however, because it had entered into an exclusive contract with a single supplier, a small, fledgling operation located nearly 500
miles from the store. Unfortunately, as the candy store's reputation grew and demand expanded, its supplier was unable to provide the needed
candies. Extensive backlogs existed and customers, quite understandably, became frustrated. Before the candy store's owners were able to sever
their relationship with their supplier and search out larger, more consistent sources, customer confidence had eroded to the point that the business
was doomed. Again, a careful analysis of the supplier and its capacity and ability to deliver, coupled with the firm's own projections of demand,
should have enabled the candy store owners to recognize this threat early enough to circumvent and overcome the disastrous implications. Again,
proacting rather than reacting is the key.
Performing an Environmental Analysis
General factors that may impact multiple industries, identified in Chapter 4, and industry-specific factors, identified in this chapter, should
be included in a firm's environmental analysis. We're now ready to look at the actual analysis.
Environmental Threats and Opportunities Profile
The Environmental Threats and Opportunities Profile (ETOP) can be an easily used and quite beneficial tool for managers. A manager looks at
the firm's environment to identify significant threats and opportunities. As used here, a "threat" is any one of a range of factors that may limit,
restrict, or impede the business in the pursuit of its goals. The presence of strong competition, changing public attitudes toward a firm's products,
an adverse economic climate, or the bankruptcy of a key supplier are all examples of environmental factors that may pose threats for the
business.
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On the other hand, an "opportunity" is any factor that offers promise or potential for moving closer or more quickly toward a firm's goals. New
high-growth markets, unmet or changing customer demands, the development of new products to complement existing lines, or a general upsurge
in the local economy may all produce genuine opportunities for the business. More on the use of an ETOP can be found in Chapter 7.
Deciding What to Consider
Managers conducting environmental analyses must decide which factors to track. For most emerging businesses, it is totally unrealistic to
believe that all the external factors that may have some influence on the firm can be constantly studied. There is neither the time nor the
resources. Moreover, much environmental information is extraneous to a particular situation and therefore has negligible effects on the
business. Managers must select the specific environmental factors that have the most critical impact on their firmdemand drivers and
competitive drivers. These become the factors to track, study, and analyze. Although certain factors may be common to all firms, each
company's managers will concentrate on a few key environmental factors peculiar to their situation. For example, all emerging businesses
are affected by the economic situation of their particular community or trade area, but the need to track and monitor specific economic
changes differs greatly from business to business.
A local variety store may wonder whether interest rates and unemployment are affecting its business. However, because the bulk of its sales
comes from low-price, high-turnover items, interest rates and unemployment don't visibly impact the store's sales. In comparison, a growing
woodworking business that specializes in the crafting and building of kitchen cabinets is in a much different situation because its sales
represent investments by consumers in their homes. Kitchen cabinets are expensive, a luxury that consumers might postpone if economic times
are tough. The firm's management knows that as interest rates and unemployment climb, consumers are less likely to consider purchasing new
kitchen cabinets. Therefore, in developing their environmental analysis, these managers closely monitor interest rates and unemployment shifts
as indicators of their projected level of business activity.
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Importance of Historical Trends
One way to be sure which external factors are most important to a business, both today and in the near future, is to rely on historical trends. A
careful examination of the past may reveal the environmental factors that have most critically affected the business and are relevant for future
consideration. In spite of the considerable merit and value to this approach, two problems exist in using historical evidence. First, these
historical data may not be available because the variables may not have been monitored carefully in the past. Second, historical evidence may
not be relevant to the firm's future needs because the emerging business often exists in a rapidly changing, volatile environment.
It may be unrealistic and even dangerous to assume that past trends are indicative of future business conditions. Therefore, forward-oriented,
insightful, proactive thinking may be lost if one adheres totally to historical trends. This does not imply that past records and trends don't
provide meaningful and interesting input that should be considered. It does imply that the firm needs to consider more than just historical
recordsto extend beyond these records. To the extent that it is available and relevant, historical information is valuable, but it is the beginning
rather than the end of the analysis. Historical information is valuable to identify underlying trends. The difficulty in forecasting is attempting
to assess the potential impact of general and industry-specific factors on the future of an industry.
Another caveat is that organizational success may foster an attitude of invincibility and prompt managers of emerging businesses to refrain
from devoting the necessary energy to environmental analysis. In fact, a firm's past success can be a formidable barrier to planning and change.
An argument is often heard: "We've been doing it this way, and we've been successful. Why should we change now?" Businesses with such an
outlook are forced to change when the bottom line suddenly shows declining results. This doesn't mean that the business must always be in a
state of flux; indeed, managers may determine there's no need for change. But a decision not to change must be based on careful analysis and
evaluation, not on complacency. If a manager continually assesses, analyzes, and interprets key environmental cues, the basis for decisions is
grounded in thoughtful reason.
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Environmental and competitive analysis must be ongoing. Just as a firm's environment is continually in a state of flux and evolution, the
firm's analysis efforts must be similarly dynamic. When times get tough and a business is troubled, many owners of emerging businesses turn
their backs on environmental analysis, arguing they are confronted by too many pressing problems to spend the time and energy necessary to
deal with environmental concerns. Such reasoning is dangerous and may serve to exacerbate an already difficult situation. How can the
business make the necessary decisions to reorient its business and adjust its strategic outlook without a keen awareness of its key
environmental concerns? Environmental assessment and analysis form the basis for overcoming the firm's problems. Rather than being a
time-consuming barrier, environmental analysis is a tool for corrective action.
Sources of External Information
A consultant may secure information necessary for environmental analysis from a number of sources. These may be secondary (existing) sources
or such primary sources as market research, customer interviews, or a study of competitors' products. Sources of information can also be
distinguished as internal to the firm (for example, management expertise) or external to the firm (for example, government publications). Figure
5.3 illustrates four potential sources of information based on the distinctions between primary versus secondary data and internal versus external
data. Whichever approach or combination of approaches is used, constant awareness, monitoring, and openness to environmental shifts and
fluctuations are critical.
Collecting Primary Internal Data
The first step for a consultant in acquiring industry-level information is to meet with the management of the emerging business. Members of
management spend every day of their working lives in their specific industry. Overlooking this potentially rich source of information could
be extremely detrimental to gaining a comprehensive understanding of external factors.
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Figure 5.3
Environmental Data Sources
To identify the key environmental concerns most relevant to a business, the consultant may want to periodically engage managers in
environmental brainstormingan open, freewheeling discussion that zeros in on the dynamics of a firm's particular environment. Brainstorming
not only solicits important contributions from employees but is also an excellent vehicle for communication. Discussing the needs and direction
of the business can foster understanding by, and commitment from, key employees.
Questions about how often brainstorming meetings should be held, who should attend, and how long they should last are difficult to answer,
but we'll offer some guidelines. The timing of brainstorming sessions is dictated by the rate of change presently taking place in the industry.
A business that exists in a fairly stable industry with few contemplated changes can afford to meet less often. A business in a growing or
evolving industry that is inundated with new forces, demands, technology, and competition will be forced to have more frequent sessions. At
a minimum, these sessions should occur annually, with more volatile industries convening perhaps every six months.
Three to four hours should be allotted for such sessions. Once the program is in place, employees can do the necessary premeeting preparation
on their own time, thereby shortening the meeting time. Initially, however, it is important to allow enough time for good, creative points to
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surface. Participants should include all employees who have key contacts with the environment. For example, top salespeople or marketing
people, financial people, those who contact or deal with customers and suppliers, and the board of directors (if there is one) would be
reasonable persons to invite to share their comments.
Procedurally, the consultant can facilitate an environmental brainstorming session in a number of ways, although a fairly structured format is
preferable (at least for the initial session). Asking participants to prepare an Environmental Threats and Opportunities Profile may start the
session. (This approach to the ETOP is slightly modified from traditional parlance so that it is more relevant to the needs of the specific
business.) First, ask participants to list (independently) the key environmental threats and opportunities that they see for the business both today
and for the next year.
Reaching conclusions is not important at this stage. The object is to bring ideas and points for thought to the surface. It is probably best to
accept everyone's suggestions without comment, waiting until later to reflect, analyze, and pare down the list.
Once participants have listed their threats and opportunities, they should rate each factor in terms of its impact on or significance to the firm. It
probably isn't necessary to prescribe a detailed rating schemetry asking participants to rate each factor as extremely significant, significant but
not of the highest priority, or only mildly significant.
After all items have been rated, participants then present their ratings along with their justification or reasoning. Concentrate on
commonaltiesthese will require little discussion. If everyone lists new competition as a key threat and assigns it the highest priority, then this
factor clearly becomes an area of needed focus. If differences exist, participants should discuss them. For example, why does one participant
recognize suppliers as being a critical threat when no one else even lists this factor? Maybe this person knows something no one else does,
or perhaps he or she is off base. Nevertheless, the input and ensuing discussion are critical.
The process takes time, but it forces key personnel to become involved in the planning process and provides valuable information that may
be unavailable or insufficiently detailed in historical analysis. The composite listing/rating that evolves, in conjunction with insights gained
from historical data, identifies the environmental factors the firm will attempt to track, and information about these factors needs to be
constantly gathered and monitored. It is important that the business realize environmental analysis is an ongoing task. Figure 5.4 provides
an overview of guides to environmental brainstorming.
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Area of Consideration Explanation

How often to meet? Depends largely on industry
At least annually
More often for rapidly changing, more dynamic industries.
Who should attend? Top salespeople

Top marketing people
Top finance people
Those in direct contact with customers
Those in direct contact with suppliers
Board of directors
Preplanning? All participants bring to the session any data relevant to their areas of
expertise
Meeting dynamics? Each participant shares information

Participants prepare and rate ETOPs
ETOPs and rating are shared and discussed
Commonalties are noted
Priorities are established
Figure 5.4
Guides to Environmental Brainstorming
Collecting Primary External Information
Collection of primary external data consists of obtaining information directly from individuals outside the organization. It may include focus
groups, interviews or surveys with suppliers, customers, and competitors. When deciding how to collect data, the consultant should first
consider what types of information should be drawn from the research. For example, let's assume a company is interested in segmenting a
customer market. A survey may be designed to measure how respondents rate several purchasing drivers (e.g., price, quality, serviceability,
reputation, and delivery). In addition, the survey should identify demographic factors that may assist the researcher in segmenting the market (e.
g., age, income level, education level, and gender). After the data are collected, the survey results may illustrate that people with a specific
demographic background identify different purchasing drivers than people with a contrasting demographic background.
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Collecting Secondary Internal Information
Secondary internal data are existing information the company may already have collected and put on file. Ask the company's managers for any
information they may have collected about their industry and/or competitors. Even if they are not sure whether certain data would be useful, it is
still necessary to review the informationthe consultant should be the judge of how useful the information may be.
Collecting Secondary External Information
Secondary external information consists of existing documentation that can be found at most business libraries and on the Internet. Figure
5.5 provides a list of information sources for both macroenvironmental factors (Chapter 4) and industry-specific factors (Chapter 5).
1. For a retail store, what are the best sources of information on the local economy and general conditions?
2. How can I find information about my competitors' prices, services, profits, and strategies if
a. they are publicly held companies?
b. they are privately held companies?
3. How does a manager use historical data when forecasting future trends?
4. What are the advantages and disadvantages of using an industry life-cycle model?
Notes
1. John P. Robinson and Geoffrey Godbey, ''Has Fitness Peaked?" American Demographics 15, no. 9 (September 1993): 36-42.
2. The following discussion draws on Michael E. Porter, Competitive Strategy (New York: Free Press, 1980).
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Factor Sources
Technological Technological Forecasts (PricewaterhouseCoopers)
Predicasts Forecasts
Industry trade associations and journals
Legal Industry trade association reports and journals

nii.nist.gov/ (accessed 6/3/98
Social Statistical Abstract of the United States

Statistical Abstract of the World
Survey of Consumers (University of Michigan Institute for Social Research)
Demographics U.S. Bureau of Census

Demographic Yearbook of the United States
Statistical Yearbook
Area chamber of commerce
www.easidemographics.com (accessed 6/3/98)
www.census.gov (accessed 6/3/98)
Economic Economic Indicators

World Fact Book
Economic Report of the President
Standard and Poor's Industry Surveys
Census of Manufacturing/Retail
Chamber of commerce reports
www.bls.gov (accessed 6/3/98)
www.fcnbd.com (accessed 6/3/98)
www.census.gov (accessed 6/3/98)
Global Statistical Abstract of the World

Management International
Economic Intelligence Unit (EIU)
National Trade Data Bank (NTDB)
Industry Specific Market Share Reporter

Standard and Poor's Industry Surveys
Industry Norms and Key Business Ratios
Robert Morris Associates
Census of Manufacturers
Industry reports from business periodicals
Trade association reports and journals
Local chamber of commerce
Figure 5.5
Sources of Environmental Information
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Chapter 6
Internal Analysis
This chapter extends the analysis phase of the strategic planning model by examining a firm's internal condition. The internal analysis offers a
profile of the firm's operations and is geared toward pinpointing and assessing the key internal strengths and weaknesses of the firm. Chapters 4
and 5 examined external factors that may impact a firm's ability to compete. Managers should be aware of key environmental threats and
opportunities before beginning the internal analysis.
This chapter is divided into four categories, each with a number of subareas. Once you have completed this chapter, you should be able to
• understand the complexities of an internal analysis;
• determine which areas of a business should be analyzed;
• measure strengths and weaknesses in a business based on external benchmarks; and
• create a company profile for a business.
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Value of Internal Analysis
Objective internal analysis is essential for at least two reasons. First, many managers of emerging small businesses have inaccurate perceptions of
their company's internal state of affairs. Often, they rely on personal opinion or "feel" to assess their firm's internal condition, which may result in
an unrealistic perspective of the company's capacity, potential, and areas of concern. Only through a careful and systematic internal analysis can a
reasonable and meaningful profile be attained. In Profile 6.1, managers of MRM performed a careful assessment of the company's internal
condition and were surprised by what they found. As the result of internal analysis and strategic planning, they realized a single supplier to their
distributorship that accounted for 40 percent of MRM's sales cost far more than it contributed.
The second reason for doing an internal analysis is even more important. Essentially, internal analysis reveals whether a business has available
the means for dealing with its environmental opportunities and threatsa critical revelation. It can change the focus of a company's activities and
strategies and, in many situations, save the business from disaster. Yet for many companies and managers, it is a forgotten step in the logical
planning sequence. Business managers tend to move strategically to capture opportunities without carefully considering their ability to do so
successfully.
Managers must mesh their environmental awareness and insight with a corresponding understanding of internal demands. Moving aggressively
in the external environment without adequate internal support will, in most cases, lead to serious difficulties. These points are reinforced quite
dramatically in the now classic example of Osborne Computers, described in Profile 6.2.
Elements of Internal Analysis
Internal analysis requires time and commitment. It's not unusual for companies to spend several weeks analyzing their strengths and weaknesses.
The rewards for conducting the analysis, however, are many.
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Profiles 6.1
Giving Up Your Best Customer

Tony Rigato is owner and CEO of MRM, a $10 million distributor of pneumatic industrial components in
Novi, Michigan. A distributor is a business that buys products in bulk from manufacturers and then sells
them to a number of customers. Its customers may be retailers, industrial customers, or consumers,
depending on the nature of the business. When he was first introduced to strategic planning, Rigato had no
intention of dropping his key supplier. But sometimes strategic planning uncovers information that you
don't really expect.
As part of MRM's strategic planning process, which was repeated annually, 12 objectives were determined.
One of these was to increase sales from $4 million to $10 million in three years, which still begs the
question, "If the goal is to more than double sales in three years, why would you jettison a supplier that
accounts for 40 percent of your sales?" The answer came from the analysis that goes along with strategic
planning. Rigato discovered, as he and his team went through a brutally honest internal analysis, that MRM
was spending 70 percent of its resources getting 40 percent of its sales. Clearly, such a situation couldn't
continue; alternative suppliers had to be found.
Even with some temporary setbacks as new contacts were formed, MRM's decision to drop its major
supplier was necessary and correct. By 1997, MRM's sales had hit $13.5 million, profitability had
increased substantially, and employee turnover reached an all-time low. Rigato noted that "none of what
we've been able to accomplish would have been possible without strategic planning."
Source: Donna Fenn, "No More Business as Usual," Inc., November 1997, pp. 114, 119.
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Profiles 6.2
Osborne Computer Corporation

In the early 1980s, Adam Osborne revolutionized the personal computer industry. By carefully assessing
consumer needs followed by astute marketing, Osborne built his empire to one that by 1983 was selling
10,000 machines a month and earning an annual revenue of more than $100 million. (Keep in mind that the
personal computer industry was in its infancy in the early 1980s.)
His approach was basic: He delivered a technologically sound machine (Osborne I), sold it at two-thirds
the price of its closest competitor, offered over $1,500 worth of brand name software at no additional cost,
and packaged it in a portable, 26-pound easy-to-carry unit. (Laptops did not exist then!)
When the Osborne I proved successful, competitors recognized the viability of this new segment of the
computer business and aggressively entered the market with their own products. To counter, Osborne
developed a new portable computer, the Osborne Executive, that improved on the original Osborne I by
providing more memory storage and a larger screen, yet still sold for a relatively attractive $2,495. Further,
the Executive was to be IBM compatible.
Osborne began publicizing the machine in electronics journals and publications well in advance of its
expected delivery date. Because of the notable improvements over the Osborne I, dealers were impressed.
In fact, they were so impressed that they stopped orders of the Osborne I to wait for the arrival of the
Executive.
But production delays plagued the Executive. Publicity was distributed, dealers were ready to order, but the
machine was not yet available. At the same time, sales of Osborne I were falling. Osborne had so
effectively convinced dealers of the power of his new machine that they abandoned the original one.
Unfortunately, the Executive couldn't be delivered. A two-and-a-half-month period of dwindling sales
brought on a debilitating cash squeeze and was one of the key factors that pushed Osborne Computer
Corporation into bankruptcy.
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Internal Strengths and Weaknesses
One of the most basic, yet insightful, approaches to internal analysis focuses on the identification of internal strengths and weaknesses. As the term
is used here, a strength is any resource or occurrence that helps the business realize its objectives and strategies, capitalize on its opportunities, or
defend against its threats. Conversely, a weakness is any factor that hinders the business from realizing its objectives and strategies, capitalizing on
its opportunities, or defending against its threats.
Internal strengths and weaknesses can be divided into four categories: financial resources, marketing resources, operational resources
(organizational and technical), and human resources. The relevant sub-components are included in the internal analysis profile in Figure 6.1.
Rating Internal Strengths and Weaknesses
In developing a meaningful internal analysis or profile, some sort of evaluation or rating scheme must be used to identify strengths and
weaknesses. Such a scheme should be easy to use yet comprehensive and complete. The internal analysis profile in Figure 6.1 fulfills these
objectives. Each internal factor or resource examined is given one of five ratings: strong weakness, slight weakness, neutral, slight strength, or
strong strength. Clearly, degrees of strength and weakness exist. A given factor or resource must be assessed and weighted as being slight,
neutral, or strong. Further, some factors may not be currently relevant but may still be included in the analysis if they are expected to become
relevant in the near future.
Evidence such as financial ratios, defective-product rates, or labor turnover data may provide an objective basis for choosing a particular rating
category, but such evidence is often unavailable. Managers, for example, may want to know the effectiveness of advertising but have no figures
relating sales to advertising efforts, so they use judgmental approaches. Of course, steps addressed in the following section can be taken to build
confidence and objectivity into these judgments.
Many variables are available for analysis. Within the financial area alone, over two dozen ratios could be considered. Many of these, however,
may not be relevant for some businesses and may be unavailable for others. Variables should be selected that meet three requirements. First,
they must be relevant. Second, they must be assessed with at least a reasonable degree of accuracy. Third, they must be within the owner's range
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Figure 6.1
Internal Analysis Profile
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of influence. Only if the variables meet all three tests are they useful for analyzing and improving the firm's condition.
As shown in Figure 6.1, the variables chosen here (and discussed in sections that follow) are in the categories of financial condition,
marketing capabilities, operational efficiency, and human resources. Keep in mind that the categories chosen and the variables analyzed may
differ depending on the type of company and industry involved.
Financial Resource Analysis
In a new business, adequate financial resources often mean the difference between success and failure. In an existing but emerging firm,
financial resources are a key part of its growth strategy. For example, excellent environmental opportunities may be identified along with
reasonable strategies for capitalizing on them. But without adequate financial resources, the strategies may lay dormant for years, never to
be implemented. Even more disturbing, a business may be forced to halt a viable project or program in midstream after its financial capacity
has been exhausted. Analyzing financial resources can help identify such problems and prevent such disappointing occurrences.
Problems uncovered in the financial analysis may catch the manager's attention. The problems may be in marketing, inventory control,
purchasing, pricing, or perhaps even human resources. But the problems eventually show up in financial performance, and the financial
analysis therefore becomes the most obvious starting point.
As an owner or manager begins to examine and rate the relative strength of the firm's financial resources, certain caveats must be kept in mind.
Existing financial statements should be used as tools in the evaluation process; they rely on historical data and thus are pictures of past
behavior. It is reasonable to assume that past behavior can indicate present capacity and future expectations. Yet, particularly for emerging
small businesses, these figures may not capture the firm's vitality or future prospects.
Rapid growth in an industry dictates that firms continuously invest capital to keep up with the demand for their products, which means that
emerging businesses will often be in a weak financial condition. Their financial condition may appear on paper to be far more questionable than
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a similar business that is not encountering growth. For example, many growth-oriented businesses go public without ever having made a profit.
But their potential for growth is so great that investors are willing to infuse their cash into the business.
In addition, financial analysis is only as powerful as the extent and quality of the information on which it is based. If a firm's managers have
gathered little meaningful data or have prepared scant and limited statements, it becomes much more difficult to draw worthwhile financial
conclusions. It is imperative therefore that managers do their homework and create financial reports that provide accurate information.
Many managers find it useful to compare their financial picture against some general standard. Understandably, they want to know how they
stack up against their industry's performance norms. Such comparisons can be useful barometers or checkpoints for the business but must be
approached with some degree of caution. Financial ratios, for example, may be significantly higher or lower than comparative standards yet
have a perfectly plausible explanation. Therefore, comparisons are only one way to assess the company's financial condition.
Comparative financial information may come from a variety of sources. Dun and Bradstreet publishes Industry Norms and Key Business Ratios;
Robert Morris Associates publishes Annual Statement Studies; and Leo Troy publishes the Almanac of Business and Industrial Financial Ratios.
Each covers a vast number of industries, typically further broken down by company asset size and sales. The Robert Morris Associates volume
seems especially useful for new and emerging companies. Additional comparative information may be obtained from trade associations, trade
magazines, annual reports of publicly held competitors, and other sources specifically related to particular industries.
Comparative Financial Summaries
The balance sheet and income statement are important first steps in analyzing the financial health of a company. They are especially useful
when presented both in dollars and in percentages and compared over a period of several years. Although changes are never easy to assess,
the comparative statements can be quite useful when studied specifically to determine the causes of change.
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Consider the balance sheet (Figure 6.2) and income statement (Figure 6.3) for Waverly Custom Jewelers, a small corporation that has been in
business for several years. Recently, with the rise in disposable income, Waverly has experienced a surge of growth. Its statements show
Waverly's financial summaries for each of the past four years. This historical view can offer some interesting insights regarding key changes or
trends; for example, there has been considerable growth in total assets for the firm over the four years.
Figure 6.2
Waverly Custom Jewelers Comparative Balance Sheets
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Figure 6.3
Waverly Custom Jewelers Comparative Income Statements
Looking at the year-to-year changes in each category, we see that cash grew slowly in 1996, substantially in 1997, and remained almost constant
in 1998. As shown in Figure 6.3, sales increased, decreased, and then increased again. Net income fell when sales increased, rose when sales
decreased, and then increased as sales went to the high level of 1998. This information gives Waverly's managers hints as to problems that may
need further study.
Identifying the causes of the reported changes can be quite difficult. Generally, managers or consultants must know the business and the
various conditions and occurrences that could account for the pattern of changes in order to offer reasonable explanations and evaluations.
Comparative Percentage Summaries
It's often useful to present the items on the balance sheet as percentages of total assets (see Figure 6.4); similarly, income statement items can
be presented as percentages of total sales (see Figure 6.5). These procedures provide a clearer basis for year-to-year comparisons and enable
fluctuations and deviations to be readily noticed. Operating results (Figure 6.5) suffered in 1996, as compared to 1995, when cost of goods
sold
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Figure 6.4
Comparative Balance Sheet Percentages (Vertical Analysis)
increased as a percentage of sales revenue. The picture changed in 1997 when Waverly was able to raise its prices considerably with a much
lower decrease in sales, giving a much better gross profit percentage that year. With the lower level of activity, operating expenses decreased as
a percentage of sales revenue. Growth in sales in 1998 led to a small increase in after-tax net income over 1997 with almost no changes in
percentages.
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Figure 6.5
Comparative Income Statement Percentages (Vertical Analysis)
Figures 6.2 and 6.4 indicate that the firm became less dependent on short-term borrowed funds from 1995 to 1998. Long-term debt, which was
used partially to increase inventory and partially to decrease short-term debt, was added in 1996 and 1997.
Cash Flow Statement
Despite the importance of the income statement as a financial analysis tool, the success of growing businesses may hinge more on cash flow than
on net incomecash is the lifeblood of a business. A business may show a profit on paper and still not have sufficient cash to operate for at least
three reasons.
First, if sales are made on credit, the registering of a sale does not mean that cash is received. The firm may not receive the actual cash for 60 to
90 days. Second, payments for inventory may be required at the time of ordering or receiving products, but the actual products may not be sold
for several months. Third, some expenses may be recorded on a uniform monthly basis when payment for the expense is either quarterly or
annually. Cash outflows therefore seldom match cash inflows, and a business can be cash poor in spite of making money on every sale, as
illustrated using the Waverly Custom Jewelers case.
Figure 6.6 shows Waverly's cash flow for each month of 1998. Total sales for the year are the same as in Figure 6.3, but Waverly's sales fluctu-
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Figure 6.6
Waverly Custom Jewelers Cash Flow Statement 1998
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ate by season. A high percentage of sales occurs in November and December, when customers purchase Christmas presents. Another relatively
high peak is in May and June because of graduations, weddings, Mother's Day, and Father's Day. A brief surge in sales comes in February just
before Valentine's Day. Sales are also not always in cash: some are on credit cards and some on store credit. Assume for this example that half
the sales are cash and the remainder are paid in the following month. Note that jewelry is purchased by the store two months before it is sold.
Waverly has a good credit rating and makes its purchases on credit, typically making payment the month after purchases. Thus, for Waverly,
cash payments precede sales by one month. Miscellaneous operating expenses are not broken down into specific expenses, but items such as
insurance, attorney fees, and utilities vary over the year. Although both the inflow and the outflow of cash vary over the year, they do not vary
in concert.
The importance of analyzing cash flow can be seen by even a cursory look at Waverly's financial statements. The income statement in Figure
6.3 shows total income for 1998 of $37,700. The cash flow statement in Figure 6.6 shows a net cash flow for the year of $49,175, or
approximately $11,000 higher than net income. However, monthly net cash flows varied from a +$101,200 in December to a $54,375 in
October primarily because Waverly's owners were purchasing inventory in October that was sold in November and December. If a business
similar to Waverly Custom Jewelers was low in cash and then experienced a month like October or November, it would have severe cash
flow problems.
Financial Ratios
Analyzing the three financial statementsbalance sheet, income statement, and cash flow statementprovides a wealth of information with which to
assess the financial health of a business. Even more information can be obtained by tracking ratios of variables taken from the financial statements.
The dozens of ratios that can be computed fall into four categories: liquidity ratios, activity ratios, leverage ratios, and profitability ratios. A few
ratios from within the four categories that can be tracked and computed easily can be selected as shown in Figure 6.7.
Liquidity Ratios
These ratios indicate the firm's capacity for meeting its short-run or near-term cash obligations. In other words, these ratios help in
determining whether the business has enough working capital to
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Figure 6.7
Selected Financial Ratios for Waverly Jewelers
(figure continued on next page)
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(figure continued from previous page)

get by, pay its bills, invest in the future, take advantage of immediate opportunities, and fight off unforeseen short-term crises. The two
most important of these are the current ratio and the acid test or quick ratio.
The current ratio is derived by dividing current assets by current liabilities. A generally accepted view is that the current ratio should be 2 to 1,
but this is only a rough rule of thumb that varies considerably from industry to industry. For example, if the industry is one in which the bulk of
sales are made on credit, a larger current ratio may be needed for comfort. A business like Waverly, which has a high amount of expensive
inventory, would be expected to have high current assets. The size of the current ratio is a function of how the inventory is financed. If short-
term debt is used, the ratio will be lower than if long-term debt or equity is used. The desirability of a high ratio also depends on how
conservative management is. A very conservative manager may want high inventories, high amounts of cash, and high accounts receivable to
feel secure. However, inventory uses up cash that could be used for other purposes, and a liberal accounts receivable policy means
underwriting customers' debt at no interest. Further, keeping excess cash or short-term investments on hand means that those funds are not
being invested to their maximum potential.
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How a firm compares with its industry and how it compares with itself in previous periods are important to know. In the Waverly example, note
the changes that have occurred in current ratio over the years. At the end of 1995, the ratio was below the rough rule of thumb of 2 to 1. It
improved in 1996 largely because long-term debt was substituted for short-term payables. By 1998, the ratio was very strong. In fact, the
current ratio suggests that the firm should now consider a better use of cash, particularly significant given that the industry average for jewelry
companies of this size is only 1.8.
The quick ratio (sometimes called the acid test ratio) is computed by subtracting inventory from current assets and dividing the result by
current liabilities. Because inventories may not be easily converted to cash, the quick ratio gives a more accurate picture of a firm's capacity for
short-run response to opportunities and crises by subtracting the value of these inventories. Although considerable variability is possible, a
quick ratio of 1 to 1 is typically sought; the retail jewelry industry has an extremely low quick ratio because of the value of inventory. Figure
6.7 shows the quick ratios for Waverly Custom Jewelers, which exceed the industry in each of the past four years and is quite high in 1998.
Activity Ratios
These ratios offer insight into how efficiently the firm is using its resources. The inventory turnover ratio is computed by dividing cost of goods
sold by average inventory. Again, rules of thumb vary depending on the industry. Therefore, it's valuable to compare the inventory turnover ratio in
a business with the industry average as well as with a company's historical ratios. The inventory turnover ratio for Waverly has consistently
exceeded the industry average, but the ratios in 1997 and 1998 were lower even though profits were higher. Waverly may have purchased more
inventory than it needed when it changed its pricing strategy in 1997, and the store's inventory management probably requires additional study.
The asset turnover ratio is computed by dividing sales by total assets. The asset turnover ratios for Waverly Custom Jewelers show a drop in
1997 that correlates with the drop in the inventory turnover ratio, suggesting the need to study asset management.
The accounts receivable turnover ratio is computed by dividing annual credit sales by average accounts receivable. Accounts receivable turnover
is the time it takes to collect credit sales. The ratio should be monitored carefully and compared with industry standards; it is most
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frequently used to check the receivables collection rate. Approximately half of Waverly's sales are on credit.
The average collection period indicates the average length of time a business must wait to collect its credit sales and is calculated by dividing 365
by the accounts receivable turnover ratio. This variable is important in cash flow analysis and is especially important when you also consider the
average inventory holding period (365 days divided by the inventory turnover ratio). If an owner pays cash for inventory purchases, then that
cash is not returned until the inventory turnover period plus the average collection period has passed. For example, if inventory is held an
average of 35 days and the average collection period is another 25 days, the owner is waiting a total of 60 days for the return of the cash. If this
figure is greater than industry norms or is increasing over time, it may mean that the business is either too liberal with its credit policy or has
unusual difficulty in collections.
The average collection period over the past few years needs to be determined. Significant shifts should be examined to determine if they are
caused by deliberate changes in company policies, changing customer behavior, or simply weakness in collections. The collection period
for Waverly Custom Jewelers has lengthened considerably, which may be a danger signal even though the store's liquidity ratios are high.
Leverage Ratios
Leverage ratios indicate the extent to which the business's capital is secured through debt rather than equity. These figures are quite critical for
the new or growing firm because its ability to raise additional capital may be affected by the present leverage position. The debt-to-assets
ratio indicates the percentage of assets that are funded through debt and is measured by dividing total liabilities by total assets. A ratio that is
too high may be risky. Too much debt may restrict growth and the ability to raise additional funds externally. Conversely, a low debt-to-assets
ratio may indicate inefficient use of invested capital. Waverly shows a healthy decrease in its debt-to-assets ratio, so it may be in a position to
pay out cash or to enlarge its investment in noncurrent assets.
The debt-to-equity ratio indicates the extent to which operating funds have been generated by the owner and is computed by dividing total debt
by total owner's equity. The debt-to-equity ratio for Waverly Custom Jewelers in Figure 6.5 shows a significant decrease in reliance on debt.
An important leverage consideration for many emerging small businesses is where to obtain financing when the company's leverage position
is strong. Questions of where and how the business will secure the
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funds necessary for its operations are often perplexing, and the answers may spell the difference between success and failure. Rare is the
manager who possesses sufficient financial resources to personally fund the range of needs the business will encounter. Therefore, outside
sources must be used and two fundamental concerns addressed.
First, sources of capital available to the business should be identified. The sources may be fairly informal contacts, such as loans from friends
or family; or they may be more formally established institutional bases, such as commercial banks, the Small Business Administration, or
suppliers' credit. Emerging businesses may also use angelsindividual investors willing to invest in a few high-risk businessesand venture
capitalists. Some additional sources that may be considered include sale of stock, personal savings, and credit cards.
Recognizing sources of capital is only the first step. It is also necessary to identify and clearly understand the cost of capital. The managers of
an emerging small business have to decide whether the financial cost of securing the capital is worth the gains that will accrue from applying it.
Cost of capital is not limited to purely financial terms. Some capital sources impose definite restrictions on the business, affect the business's
flexibility, and alter the managers' degree of control, costs that must be understood and balanced.
Profitability Ratios
Profitability ratios measure a firm's financial performance and financial returns. They are important on their own as they pertain to a
particular company and as they compare with industry averages. Significant deviations from industry standards or strong negative
movements internally may signal that the economic viability of the business is in serious question. In short, profitability ratios give a quick,
bottom-line picture of the firm's current financial results.
Gross profit margin indicates how selling activity provides the margin to cover operating costs and leave a profit balance, a ratio also
reported directly on the comparative percentage statements in Figure 6.5.
The return on total assets ratio measures the firm's operating performance and is calculated by dividing net income from operations by average
total assets. In other words, it is the rate of return on the total investment made by creditors and owners. Waverly Custom Jewelers, as should be
expected, shows improvement in 1997 and 1998 as compared with 1995 and 1996. Although total assets have grown, net income has increased at
a faster rate. Additional funds from incurring long-term debt seemed to do much to improve ratios and performance for this company.
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Drawing Strategic Conclusions
As noted frequently above, conclusions are more difficult to draw than financial ratios are to compute. Indeed, in assessing a firm's financial
state, ratios and statement comparisons must be used as tools to guide planners in their decisions.
But these measures are only one of the possible information sources that should be considered. The owner's knowledge and awareness of the
business may be necessary either to temper or to augment what the financial information projects. Good sense and perspective must be used in
conjunction with objective figures and computations.
Strategic thinking should pervade the entire financial analysis. For example, a low current ratio suggests that the firm could have trouble paying
its bills. However, the strategic significance is that any substantial change in the net use of funds may cause the firm's liquidity position to
worsen. Long-term capital may need to be secured to underwrite the strategy and clean up the current liquidity problem.
Similarly, leverage ratios may suggest strong or weak positions in regard to debt versus capital, but they may also dictate a financial strategy before
a planned expansion. Interpretations of ratio analyses and financial statement information are the basis for three financial resource evaluations.
First, what is the overall financial performance of the business? A number of items may need to be considered in reaching this conclusion. Next, is
the firm able to raise needed capital? Cash flows, availability of internal funds, and a firm's debt position may all be important considerations.
Finally, what is a firm's cash flow position?
It may appear overly simplistic to reduce the evaluation of financial resources to these three questions, but they are typically the three most
critical the business owner must ask before committing to the pursuit of any objective, strategy, or environmental opportunity.
Evaluating Marketing Resources
Marketing resources are rarely subjected to close analysis or scrutiny. A business often has no valid measure of the relative effectiveness of
its marketing efforts. And because managers often fail to understand the
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capacity and limitations of the existing marketing system, it's necessary to evaluate the marketing function very carefully.
In analyzing the internal strengths and weaknesses of the marketing system, managers should consider eight general categories of marketing
resources: market performance, knowledge of markets, location, product, advertising and promotion, price, image, and distribution.
Market Performance
A logical starting point is to evaluate or rate actual market performance. The most reasonable and tangible factor to consider is a firm's relative
market share. We may occasionally have enough information about the industry, market area, and competitors to calculate an objective and
accurate statement of market share. More often, only an estimate of market share can be developed based on sketchy or piecemeal data. This is
especially true in new businesses whose entrepreneurs do not have a good sense of the market and in small neighborhood companies in which
determining sales of other small competitors is extremely difficult.
For example, managers of Harley's Hardware Store in Chapter 5 knew that they faced competition from six other stores in their basic market
area. Furthermore, they knew that three of the other stores commanded the bulk of the business. Even without any specific data, these
business managers clearly understood that their firm's market share rating was relatively weak. Usually, some objective information will be
available that, when complemented by sound subjective judgments, provides a pretty accurate picture of relative market share. In other words,
some objective data as well as some subjective information may be available. The subjective information is not easily analyzed, but
experienced managers can make inferences from it.
Market share is a rather limited indicator of a company's performance that addresses only past performance; even though it indicates nothing
about future potential, useful inferences may be drawn from it. For example, if the market is competitively saturated and prospects for
industry growth are limited, the strength or weakness of present market share is probably a key indicator of whether the business will be able
to withstand and survive an industry shakeout.
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Knowledge of Markets
Managers must first know their target markets. Who are the firm's customers? What is the demographic makeup of the target market and how is
it changing? Perhaps most important, what are customer preferences and needs and how will these be changing in the future? Managers must
also know their geographical market area. What changes or developments are occurring that may reflect on or affect the business? Is the
demographic composition of the market area changing? Are important new competitors entering the market area? Managers must be aware of
important market changes and directions. True, knowledge and awareness are intangible concepts and are susceptible to a wide range of
interpretations. Yet this knowledge may be most critical in helping position a business to deal with future obstacles and opportunities.
Consider the case of Kultur International Films in Profile 6.3. Dennis Hedlund initially misread the target market for performing arts tapes.
He attempted to market them to the general public rather than to the specific clientele interested in them. A more careful understanding of
the appropriate target market enabled him to achieve his firm's potential.
Location
Although sometimes preestablished and unalterable, location dynamics can exert a significant impact on a business. In fact, poor location is
generally listed as one of the primary reasons for the failure of retail businesses. Rating the relative strength of a location involves examining
some rather obvious issues. A superb product or service may never be accepted if the business is in a bad location, but location may be a source
of considerable strength if it provides visibility to the target market or clientele. For example, Atcom/Info is an emerging business capitalizing on
the ever expanding need for information access. Recognizing that many business travelers don't carry laptop computers, Neil Senturia looked for
a way to provide these travelers computer access for sending e-mail messages, checking stock prices, or tapping into other online sources. His
idea was a public Internet kiosk, or Cyberbooth, the high-tech equivalent of a phone booth. Location became the key to his success. Senturia's
company, Atcom, installed 167 high-speed Cyberbooths at airports, convention centers, and hotelsareas often frequented by business people. 1
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Profile 6.3
Kultur International Films, LTD.

In the early 1980s, Dennis Hedlund conceived the idea of selling performing arts videosoperas,
symphonies, ballets, and other highbrow materialthrough video stores. His company, Kulter International
Films, Ltd., became the first company in the world to distribute performing arts programs on
videocassettes. Starting with only two films featuring Arthur Rubenstein and Jascha Heifetz, Kulter made
a corporate commitment to preserve on video the greatest performing artists of the 20th century for future
generations to appreciate and enjoy. Kultur's historic programs include rare performances by Marian
Anderson, Maria Callas, Mario Lanza, Billie Holiday, and many others.
Hedlund and his wife worked long hours trying to get video stores to buy the tapes. Hedlund even signed
on as a sales representative for other video companies to gain access to video stores. Still, the stores
wouldn't purchase his tapes. Store managers preferred to buy tapes of popular movies rather than stocking
even a few performing arts videos. Finally, accepting that there simply wasn't a demand for the tapes in
normal video stores, Hedlund began marketing the tapes through museums, dance studios, and art
galleries. He also bought mailing lists and made special deals with fan clubs of the performers. He placed
ads in specialty magazines catering to his particular target market. This marketing approach worked.
Today, Kultur is recognized as the leader in classical music video. He was even invited to Moscow at the
height of the cold war to forge an agreement with the Soviet Union to distribute the cultural treasures of
Russia into the West. Kultur's specialized marketing techniques were honored by Inc. and Forbes
magazines when the company was placed on the list of the 500 fastest-growing American companies.
Kultur is selected by prestigious media companies around the world to distribute their programs on video.
The Kultur catalog now contains over 1,000 programs, many of which have won Oscars,
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Emmys, and film festival awards around the world. Kultur's new release and production schedule is
unmatched by any other studio or distributor in the industry. His plans for 1998 included over 100
programs of, for example, new full-length ballets and operas, performing arts documentaries, and two
new art series.
Kultur is positioned for strong growth well into the new century. The company's unique multifaceted
ability to make available and effectively distribute the most desirable entertainment product in the world
continues to keep Kultur on its 18-year course of ever increasing growth and success.
Sources: www.kulturvideo.com, accessed May 28, 1998; and Jeffrey A. Tannenbaum, ''Video Distributor
Thrives at Last in Offering Culture." The Wall Street Journal, May 4, 1994, p. B2.
Location involves more than visibility. Other key factors include ease of access, availability of parking, traffic patterns, demographics, the
complementary nature of neighboring businesses, and the location's image. Location image can often determine customers' reactions to and
perceptions of the business. For example, an upscale boutique located in a deteriorated section of the community will probably not attract the
desired clientele. Similarly, a family restaurant will be seriously and negatively affected if it is located in a high-crime area and buffered by
bars on either side. The image of the location should support the desired image of the business.
Figure 6.8 lists a number of location factors for managers of a retail business to consider when expanding. You may want to add more. Figure
6.9 lists similar location factors that are important for growing manufacturing businesses. Many of the factors that are critically important for
retail businesses are of no concern to manufacturing businesses. For businesses such as those providing services, in which the business
representative goes to customers' homes or offices, the specific location may be immaterial.
To use a matrix, create one that has factors on it that are critical to the business being analyzed. It is important, however, to create the matrix
before performing the analysis. Once critical factors have been determined, then analyze a number of locations. Do not look for locations first.
If locations are found before managers determine the importance of criteria, managers tend to rationalize why a location is good or bad by
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Figure 6.8
Location Factors for Retail Businesses
Figure 6.9
Location Factors for Manufacturing Businesses
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choosing criteria that influence the decision, and thus the objectivity provided by the matrices is lost. Only when the criteria are established first
can the analysis be done with adequate objectivity.
Product
A firm's managers must evaluate the appeal of the products sold. Although products can be evaluated in absolute terms, the rating should also
reflect the relative strength of products from a competitive perspective. Three product-related aspects should be considered: the product line,
the attractiveness of the product, and the service provided with the product.
The product line refers to the variety of products the firm offers; and both the breadth and depth of the product line must be considered. A broad,
or complete, line enables the business to meet a wide range of consumer needs; depth refers to the choices available within a product category.
For example, one shoe store may offer a very narrow product line, limiting its business exclusively to shoes but offering a great number of styles
and sizes. A competing store, presenting a broader product line, offers not only shoes but also an array of complementary or supportive
products, such as polishes, socks, purses, and leather goods. Frequently, the store with the narrow line can still compete because of the depth of
styles and sizes. The evaluation of product line must consider not only competitive influences but also the strategic approach the business is
trying to promote. If the owner visualizes the company as a specialty business, its product line should reflect this strategy.
A second product-rating decision relates to the attractiveness of the firm's products. Here, managers need to view both product image and product
quality from a consumer or market perspective. Purchases are made on the basis of perceived image and quality, even though the perceptions may be
inconsistent with reality. If these perceptions are inaccurate, remedial action, perhaps in the form of advertising or promotion, can be used to help
correct the misperceptions. Managers should strive to obtain an objective and unbiased evaluation of these factors. Often, outsiders may have to be
consultedsmall business managers are sometimes too close to their products to make an objective assessment.
Finally, managers must consider product service, which relates to the firm's assurances that consumer and product concerns will be effectively
and fully addressed once sales have begun. Product warranties are important as are the number, availability, and quality of service
representatives and service technicians.
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Promotion
The promotions mix for a company consists of its personal selling, advertising, publicity, and sales promotion. The strength of a company's
promotion efforts needs to be evaluated; and objective evidence of the effectiveness of these efforts is available in some situations. For
example, a business may note sales growth following certain advertising campaigns. Often, however, such information is not available,
making promotion one of the most difficult areas to assess. Most managers realize the significance of reaching consumers, informing them of
the company's products, and encouraging them to make purchases. Overall advertising and other promotional emphases, however, are hard to
analyze from an objective and competitive perspective. This is one reason managers often feel that advertising and promotion is one of the
most expendable resources: The advertising and promotion budget is one of the first to be reduced or eliminated when the small business
encounters financial strains. Ironically, this is often precisely the wrong strategic decision.
To evaluate the firm's promotion activities, managers must have a feel for how important these factors are to the industry in which the business
operates. If competitors in the industry rely heavily on advertising to generate sales, for example, then meager and ineffective advertising and
promotion may be a significant weakness. However, if industry sales are driven by a few established and regular contract sales, large
investments in advertising and promotion may be unnecessary. It may be useful to compare the firm's expenditures for advertising and
promotion with those typical of the industry and with those of immediate competitors. If competitors are investing heavily in advertising, a
similar response may be necessary to keep or gain market share. Trade associations are helpful in determining industry trends or norms with
which a company's promotional efforts may be compared.
In some industries, personal selling is the key to success. This is especially true in business-to-business selling and in some service businesses.
Even in retail businesses, the sales force must be analyzed. Personal selling can be studied by looking at sales per salesperson, sales per
department, or sales per product line.
Even publicity can be studied. A company can get free publicity in a number of waysworking for charitable causes that might do a press release
noting contributions, sending news items to local newspapers, offering to be interviewed as "experts" in a human interest broadcast on television,
and holding contests for prizes. Such efforts should not be done randomly but should be carefully planned to get the most return for the effort.
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Price
Price should reflect the strategy or image the business wants to project. A discount store, for example, makes a statement with its low prices,
but managers stressing quality, service, or exclusivity often set high prices to reflect a higher image.
The strength or weakness of a pricing strategy is strongly influenced by the competition. An owner may set prices based on costs (for raw
materials, assembly, sales expenses, and others) and be unable to lower them to realize an acceptable return; but if a key competitor lowers its
prices, the firm's inability to respond accordingly may be viewed as a price weakness. On the other hand, price may be rated a definite strength
when size of operations, economies of scale, and production efficiency enable a business to offer products at consistently lower prices than the
competition.
Image
Image has both internal and external ramifications. That is, the image of the business is reflected through its internal culture or climate and in
that way affects the employees; and, in addition, the image is perceived by those outside the business and affects their attitudes toward the
business. The image should be consistent with the strategies of the business, in which case image emerges as an important strength.
Otherwise, image can be a weakness. If a business wishes to stress personal service as a competitive factor, for example, it should present an
image reflecting openness, concern for workers, communication, and trust. If quality is being stressed, an image of high skill, training, and
attention to detail is valuable.
Image evolves as the firm continues in operation. The public's perception of the firm's image is based on the historical exposure of the public to
the business. Past mistakes, missed deadlines, and arrogant previous owners may all be to blame. Clearly, these perceptions may not be the fault
of present owners, and present conditions may suggest an image drastically different from the common public view. If this is the case, the
present owners need to recognize image as a problem area and create changes in the public's perception of it. Because changes tend to be
incremental, remember that image definitely affects customer attitudes toward the business and, in turn, the consumption pattern of customers.
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Image is, unfortunately, difficult to measure, depending largely on such informal measures as complaints (or lack of complaints), word of mouth,
and recommendations from satisfied customers. Because image directly affects future customers, simply watching the type of customer that
comes through the door can indicate the effectiveness of the image message. No matter what image is sought, entrepreneurs and managers must
direct all their actions toward presenting that image.
Distribution
Are the channels of distribution accessible and acceptable? Does the product flow from the business to consumers in a reasonable and cost-
effective way? In many cases, the firm's product reaches the ultimate consumer only after passing through a set of intermediaries: A
manufacturer may distribute directly to retailers or to a wholesaler, who in turn sells to a number of retailers, or to both retailers and
wholesalers. Each stage of the distribution process may need to be evaluated to gain a clear notion of the relative strength of the entire system.
Analyzing distribution for a product-manufacturing firm should consider everything from the point at which the product comes off the assembly
line to the point when the final user receives the product. This may include warehousing, inventory policies, shipping methods, and billing.
Two factors are important in analyzing distribution: cost and coverage. The two factors tend to work against each other. A manufacturing firm,
for example, may find that it is cheaper to distribute products directly to customers, but only a few customers can be reached. By using
intermediaries such as wholesalers and retailers, added cost is incurred but significant increases in market coverage can be achieved. Often in
these cases, the cost of the intermediaries is far outweighed by the increase in coverage.
Few measures are available to indicate that distribution is being done well, but there are sometimes indications that it is being done poorly.
Products sitting in the loading dock area for an excessive amount of time, for example, indicate poor distribution. "Stockouts" among retail
stores, even though the manufacturing plant is not overworked, is another indication of problems with distribution. And if the cost of
distribution seems out of line, the area needs to be studied.
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Evaluating Operational Resources
Operational resources are those that are involved with or that support the production of a product or service. They may relate to the
physical elements of a job or to relationships within the business and with key contacts outside the business. Clearly, relevant resources
are numerous, but five key areas must be evaluated: production facilities, access to suppliers, inventory control, organization structure, and
quality control.
Production Facilities
Production facilities should be viewed broadly, and a number of issues should be considered when rating these facilities. First, the firm's
existing plant and equipment must be evaluated. Is the physical plant large enough to handle the desired scope of business operations? Has
the business made the technical advances in plant and equipment necessary to remain competitive? Is the equipment used by the business
technically and operationally sound and efficient?
Part of this analysis should address the issue of capacity. Is the business operating near capacity or significantly below capacity? Either
condition could be viewed as a potential weakness depending on the growth projections of the business. Further, the physical layout and work
flow must be evaluated. Do the production facilities permit work to be arranged in the most efficient and productive manner?
Access to Suppliers
Of the two basic questions that emerge here, the first concerns basic availability. Does the business have ready access to necessary raw materials
and suppliers? The second question concerns the cost considerations that must temper availability. How much do materials and supplies cost? A
promising opportunity may be hurt by either costly or inconsistent sources of supply.
Managers of growing manufacturing companies must determine whether to purchase their inventory of components from a single supplier or
a number of different suppliers. This problem is made worse if the industry as a whole is also rapidly growing, in which case availability of
components may be a continuing problem. Some manufacturers
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rely on strategic alliances with suppliers to ensure the availability of quality products. Other manufacturers may go a step further and actually
buy their supplier in order to control the availability of products.
Retailers have an especially close dependence on suppliers. Managers must carefully consider that relationship because customers may depend
on the retailer to purchase specific brands of products. Changing brand selection or suppliers may adversely affect customer relations. Service
businesses typically are not as tied to suppliers as are retailers or manufacturers, but managers of service businesses should still look at the
relationship with suppliers as part of an overall internal analysis.
Potential entrepreneurs must carefully assess supplier relations before beginning their business. If suppliers can't be relied on, the entrepreneur
must weigh that risk against the alternative of using other, perhaps more expensive, suppliers or even not starting the business at all. In one
previously mentioned case, a candy retailer had to completely close down after a key supplier couldn't meet the retailer's needs.
Inventory Control
In examining inventory, a manager evaluates the strength of the system for stocking, ordering, and reordering materials (raw or finished
products). Success in this area may be the key to meeting customers' needs on time. Does the manager know what materials are on hand? Can
they be located and accessed? Are there clear, established procedures for initiating reorders? Is there usually an acceptable level of materials in
stock, or is the business regularly plagued with inventory backlogs and outages? For startup companies, an inventory control system may not need
to be computerized or highly sophisticated, but it should prompt action that will ensure steady, desired inventory flows. As a business grows,
however, the inventory control system may need to become automated, ranging from a simple spreadsheet-type program to a completely
automated bar-coding system that electronically places an order with suppliers' computer-based ordering systems when inventory reaches a
certain level.
The emerging business faces an inventory dilemma: Needed inventory must be on hand so that production runs are not hampered and customers
are not frustrated at production delays, but inventory holding costs can be quite formidable. Therefore, the emerging business tries to limit
inventory to the basic level it needs to maintain a consistent flow of operations, an option provided by the popular just-in-time (JIT) inven-
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tory system. Under the JIT system, the supplier delivers components when, where, and in the quantities needed. Of course, a JIT system is only
as effective as the relationship and communication that exists between the business and its suppliers. Automated information systems are
essential, so all of the factors discussed here may need to be weighed when evaluating the system of inventory control.
The need for inventory control goes far beyond simply counting inventory. In a high-growth market, a firm's managers may decide to produce
components themselves rather than risk unreliable suppliers. On the other hand, managing substantial amounts of inventory is expensive in
addition to the internal cost of producing the products in-house. New businesses are often well advised to outsource everything possible to
reduce the fixed cost of plant and equipment necessary to produce components in-house.
Structure
The structure of an organization is the formal flow of information and authority within it, indicating the jobs that people do and accompanying
areas of responsibility. The organizational structure should be consistent with and support the strategies and objectives of the business. If the
business desires operational flexibility, an informal or open structural system may be preferable. The key to evaluating the structure is to note if
the business and its personnel are restricted by the demands of the structure or if the structure is logical and helps employees fulfill their
responsibilities.
Managers of new and growing firms will often choose to structure the business around functional areas, that is, marketing, finance, accounting,
human resources, and operations. Others may want to build the structure around particular products. Still others, especially service businesses,
may want to structure around particular key customers. The important part of this analysis is to determine whether the structure is as efficient as
possible while still allowing the company to achieve its objectives.
A problem that is unique to emerging businesses is the need to change or adjust the structure to accommodate the growth of the business.
Indicators of inefficiencies in structure are miscommunication, delays in getting authority to implement new ideas, problems in dealing
with customers, employee complaints, and defects in products. If the problems are indeed caused by an inappropriate structure, solutions
may include restructuring around key customers, key products, or key processes to become more attentive to priority areas in the business.
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Quality Control
Managers of any business must evaluate the policies and procedures that the organization uses to ensure the quality of its products and services.
We live in an era when business is held to ever rising quality standards. In fact, quality is one of the strongest explanations for the long-term
success of a business in today's competitive environment. The assessment of quality is especially important for both new and emerging
businesses because both are vulnerable during start-up and growth phases. Because managers' attention will be distracted by the demands of start-
up or growth, quality may slip because of inattention. Thus, special efforts must be made to assess quality and ensure that it receives adequate
emphasis.
Although quality may be assessed from many perspectives, users of a firm's goods and services often offer the most important signals.
Customers and clients provide excellent evidence of their satisfaction with quality by their reactions to the products and services they receive.
For example, if the business provides components for a large industrial manufacturer, quality specifications are normally designated
contractually. Failure to meet these standards may mean losing the contract. On the other hand, if the business serves a retail or service
market, customer complaints or product returns may signal quality deficiencies.
Managers, however, should not assume that quality is acceptable simply because customer complaints are not being heardunacceptable quality
may be reflected in decreased sales. A slip in quality is often difficult to detect, and quality comparisons between competitors are often quite
subjective and subtle. Therefore, specific procedures must be enacted to detect quality concerns. Some businesses, for example, rely on
customer surveys to find potential quality problems, whereas others conduct regular internal audits to spot problem areas. Whatever set of
procedures is used, quality assessment is a critical factor in internal analysis.
Evaluating Human Resources
The final category of internal factors that should be analyzed is a firm's human resources. Although this component is often overlooked, a
firm's employees may be one of its most critical assets. We view human resources broadly to include all employees of the firm along with
their unique skills and abilities.
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An initial concern for new businesses is to examine the number of employees required and the relevancy of their skills. An entrepreneur may
be tempted to either overstaff or understaff a new business either because of grandiose plans or a too limited vision of the firm's potential.
Another fault that is typical of an entrepreneur is to hire friends or relatives. Unfortunately, this is often done without regard to the relevant
skills each possesses, and, as a result, the entrepreneur is often faced later with firing those same friends or relatives because they don't share
the entrepreneur's vision for the company. It is better for the entrepreneur to carefully consider the real needs of the new company and select
employees accordingly.
Similarly, managers of growth-oriented businesses must determine how many employees are needed and what specific skills are required to
make possible the desired growth. If required skills are missing, the firm must either train existing employees or hire additional workers who
have the necessary skills. As the business grows, human resource planning can become quite complex. This is especially true for companies that
are growing rapidly; the manager often can't hire new employees fast enough to support the growing business. It is tempting for emerging
business managers to want to personally hire each new employee, but that is a time-consuming process. The manager must soon realize that the
recruiting and hiring process has to be delegated to others.
A second human resource consideration is the assessment of employee morale and management-labor relations. Morale is a key factor yet
fairly difficult to measure accurately. In most situations, the business need not take the time and effort to conduct a formal morale survey; a set
of more informal indicators may suffice. Employee turnover, absenteeism, tardiness, and a general assessment of the workday climate should
provide a notion of morale. Frequent grumblings, complaints, arguments, and conflicts may indicate weakened morale. Again, an attempt
should be made to ascertain a general feeling about morale as it affects business action. Morale should never be ignoreda poorly motivated
and uncommitted workforce can undermine a well-focused growth strategy.
Although morale is important in any business, it is especially important in a new business or one embarking on a concerted growth strategy,
where the morale and cohesiveness of employees is critical. In these two situations managers must depend heavily on employees to carry their
share of the load and more. Often, long hours are required to keep the business going. Employees with good morale are usually willing to put in
that extra effort, even if the pay is less than that in competing firms. But poor
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morale results in employees unwilling to put out extra effort and who may have to be cajoled into working at a productive level. Poor morale
certainly can slow down the work process and can sometimes be severe enough that a growth strategy may have to be abandoned completely.
A third factor to examine is the business's compensation systemthat is, wages and salary plus any fringe benefits. For our purposes the
essential determinations are whether the present compensation system is (1) adequate and (2) consistent with the strategic direction of the firm.
The adequacy of a firm's compensation is determined by both internal and external comparisons. Internally, most workers will feel compensation
is adequate if it is distributed equitably; that is, better performers earn more than lesser performers. However, if considerable work is being done
in teams, team members must feel their compensation is fair in relation to one another. Indeed, an internal perception that compensation is
equitable is key to employee motivation and the credibility of the compensation system. Externally, adequacy of compensation is largely a
function of competition. Are workers receiving compensation that is reasonably consistent with that of workers in similar firms and industries?
Workers may be willing to accept a lower salary if other factors make up for it. Suppose, for example, that two businesses are competing for
the same labor market. One provides a slightly higher compensation package, but the second offers a more challenging, interesting, and
pleasant work environment. Some workers may feel that the opportunities available at the second business outweigh the compensation
difference. But managers should not deceive themselves. In general, workers expect compensation that is similar to, or better than, that of
competitors.
The compensation system must also be consistent with the strategic thrust of the firm. If the firm is moving aggressively into new markets and
depending on the efforts of its sales force to attract new customers, the compensation system must reflect this dependence. Quotas, bonuses, or a
commission system may be needed to motivate workers to attract new contacts and businesses. The firm's hourly wage may have worked fine in
the past, but new demands require new motivational efforts.
When compensation is discussed, it is usual to assume that the focus is on dollars. Yet much compensation is nonmonetary; such things as
office furnishings, company cars, vacation scheduling, and more interpersonal issues can also affect the motivation of employees. For example,
the willingness of managers to allow employees to adjust their working hours may have an impact on motivation. If managers are attempting to
build a unified, loyal workforce with a strong commitment to the busi-
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ness, then companywide performance incentives may be appropriate. A properly designed system can help the manager achieve desired results.
A final human resource area that should be assessed is training. Here the question to be answered is whether employees are receiving the
training necessary to do their jobs well. Training can be either in-house or off-site. It can be either technical training on how to use new
software programs or classes on team building. Training should be ongoing as long as it does not unduly interrupt the actual work of the
business. Managers should have an eye open for indications of the need for training.
One area in which training is important in today's businesses is technology. Computers and software change so rapidly that it's difficult to keep
up with new developments. Sometimes sending people to half-day or full-day workshops yields productivity far in excess of attempts to train
employees in new processes during normal workdays.
Our list of internal areas or factors to be analyzed is by no means all-inclusive but merely is intended to provide a general framework for those
beginning the process of internal analysis. Starting the internal analysis with a general framework is critical. Quite often, managers from small
businesses to Fortune 100 companies attempt to perform comprehensive internal analyses by simply attending a half-day retreat to ''brainstorm."
While this approach may provide creative insights into sources of strengths and weaknesses, when used alone it may also expose a firm to
unnecessary risks. When managers simply brainstorm to analyze their internal operations, they may overlook critical sources of competitive
strengths or weaknesses. A specified methodology can ensure that they cover all their bases when performing an internal analysis. Using a
general framework during an internal analysis will decrease the possibility of getting blindsided by missing a source of critical strength or
weakness.
Clearly, there is no single approach that applies to every organization. Therefore, it will be necessary to select those items that are most relevant
to the particular situation, perhaps evaluating areas other than those noted in this chapter. Or the list can be a condensed version of
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what is presented here. As a company and its managers become more experienced with the strategic planning process, the internal analysis
should become more focused and specific to the needs and demands of the business. Managers will soon learn which factors are key indicators to
the business and analyze these factors in greater depth.
Future-Oriented Framework
This chapter may help those interested in assessing the current position of a firm, but the focus of the book is strategic planning. More important
than a firm's current position, therefore, is a firm's position in relation to its future ability to compete and its ability to achieve long-term
corporate goals.
We are interested in a firm's current financial position, but we are more interested in its capability to embark on a new strategy given its
current position. We may determine that the distribution system is adequate. But when we consider that we may be expanding next year, then
the distribution system may not be adequate. The morale in a manufacturing plant may be acceptable, but will it still be after we make major
changes in the manufacturing process? The focus must be on the future.
Externally Driven Perspective
As noted in previous chapters, strategic planning is an externally driven process. Therefore, it is imperative that external conditions are
sufficiently understood before a firm starts its internal analysis. Quite often, firms will look inward in an attempt to identify strengths
and weaknesses. Remember, though, it's not the firm that determines strengths and weaknessesit's the market.
Consider, for example, a firm that embarks on the internal analysis process by looking inward rather than looking outward at the external
environment. Managers of the firm may conclude that their reputation for stability is a core strength for the company, so the company decides
to invest considerable resources to further develop this perceived strength. Suppose, however, that customers in this firm's market aren't
concerned at all with a reputation for stability. They aren't loyal to any one firm because their only concern is getting the product for the
lowest
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possible price. In such a case, the firm is investing resources in something that the market doesn't consider important. Not only is the firm
wasting time on something that doesn't improve its competitive position, but financial resources may be misallocated rather than being invested
in something that would benefit the company's long-term success.
1. Should external analysis be done before internal analysis? Why or why not?
2. Why is collecting accurate data about the "people" part of the business difficult?
3. How do you decide which areas to analyze first and in how much depth?
4. Choose a company that you know well. Perform an internal analysis, including the following:
a. Financial analysis
b. Analysis of the strengths and weaknesses related to marketing
c. Analysis of the efficiency of the firm's operations
d. Analysis of the human resources of the company, assuming low growth and then assuming high growth
5. What would likely be key internal factors for the following businesses? Will your answer be the same for each of them?
a. a research engineering firm
b. a manufacturer of computer printers
c. a food wholesaler
d. a retailer of cellular phones
Notes
1. Shaifali Puri, "Cool Companies," Fortune, July 7, 1997, pp. 87-88.
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Chapter 7
Recognizing Distinctive Competencies and Competitive Weaknesses
Chapters 4, 5, and 6 detail the process of analyzing the external environment and the internal strengths and weaknesses of a company, with stress
on the importance and relevance of careful analysis. Those chapters focus on data gathering and analysis and address what things we should
consider, how to gather information, and how to analyze information to reach conclusions. This chapter considers the final step in the analysis
phase of our modelrecognizing distinctive competencies and competitive weaknesses. The chapter blends the external and internal analysis,
allowing managers to take advantage of the company's strengths and offset its weaknesses. Considering distinctive competencies and
competitive weaknesses is necessary when crafting the company's strategies. After studying this chapter, you should be able to
• define distinctive competencies;
• understand how to develop a strength into a distinctive competence;
• realize the importance of a sustainable competence; and
• recognize the difference between a weakness and a significant competitive weakness.
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Environmental Opportunities Versus Relevant Business Opportunities
Analyzing the relevant external environment will likely reveal a number of possible areas of opportunity. Perhaps competitors have become so
big they no longer provide the personal touch that consumers have come to desire and expect. Perhaps new segments or niches in the market
are appearing but have not been targeted. Perhaps consumer needs and preferences are shifting so that adding complementary products or
services will significantly increase sales and profits.
Merely identifying opportunities, however, does not mean that a firm either can or should take advantage of these opportunities. This
determination is made after carefully considering the internal analysis. For example, changing demographic and social factors within a given
community may suggest that a restaurant-dinner theater combination is an attractive opportunity. Suppose there is no dinner theater in the
community and the increasing population base of young, upscale consumers seems likely to support one. A particular restaurant in the
community may accurately recognize this as an environmental opportunity. But internal analysis clearly reveals that the restaurant has neither the
employees nor the financial resources to commit to such a project, so the environmental opportunity can't be translated into a relevant business
opportunity. Environmental opportunities only become relevant business opportunities when an internal analysis reveals that a business is able to
capitalize on these opportunities.
The distinction between environmental opportunities and business opportunities is critical for emerging businesses. Care must be taken to make
sure growth opportunities are, in fact, the best areas of growth that the business should pursue. This can only occur through a thorough
understanding of the firm's internal condition. Successful growth requires a careful mesh between opportunities and capacities.
While perhaps less obvious, new ventures face similar issues. Entrepreneurs, for example, must determine whether resources are sufficient to
pursue new competitive options. Indeed, one of the most insightful responses owners and managers of new ventures may make is to back away
from some environmental opportunities. In some cases, pursuing opportunitieseven seemingly promising opportunitiesmay drain resources to
the point that the business is simply spread too thin.
A company's managers may be able to identify a number of environmental opportunities. In general, the more dynamic and growth oriented
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an industry, the greater the number of environmental opportunities. Similarly, the more open, responsive, and financially sound a business is,
the greater the number of relevant business opportunities it is likely to realize.
The distinction between environmental opportunities and relevant business opportunities may be somewhat arbitrary or subjective; yet it is critical
to strategic planning. A business must be concerned with acting on those opportunities that have survived the scrutiny of internal analysis and
become relevant business opportunities.
The Role of Distinctive Competencies
A distinctive competence is any area, factor, or consideration that gives a business a meaningful competitive edge. Distinctive
competenciesactivities that a firm not only does well but does better than all other competitorspositively distinguish a firm from its
competitors. Distinctive competencies may include superior products, brand loyalty, or technological know-how. They may even include
processes used by a firm such as ISO 9000 certification or an effective just-in-time inventory control system. Distinctive competencies often
emerge and grow as managers position a firm to enhance its competitive position. 1 Consider the case of Amazon.com that is presented in
Profile 7.1. Started in July 1995 as an online store, Amazon.com is a rapidly emerging business. Along the way, it has carefully crafted a
distinctive competence: It has found a unique niche in a highly competitive industry by capitalizing on available technology and consumers'
growing need for convenience.
Identifying and Developing Areas of Distinctive Competence
Distinctive competencies may appear in either of two ways. One way is their appearance as part of a firm's current operations. As the business
exists over time, it operates in such a manner that clear and important competencies are present, perhaps having initially arisen out of the
firm's mission or managerial orientation. Over time, they become an integral part of the business. Courtland Clubs (Profile 7.2) is an example.
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Profile 7.1
Amazon.Com
Hey, let's go browse in a bookstore. How about Amazon.com? OK, have a seat and turn on your
computer.
Amazon.com is not your father's bookstore. It is also not your local Barnes & Noble, Borders, or
Crown. But if you ask many people where they buy their books, you'll soon hear someone mention
Amazon.com.
Amazon.com is a virtual bookstore. Located in a downtown Seattle office building, books are
nowhere in view. Amazon actually stocks a few hundred high-demand titles, and these are in a
warehouse somewhere in Seattle, but Amazon.com can get you almost any book in print. (Even this
book is available.) Some books will be shipped in 24 hours; some require two to four days. Browsing
the Amazon.com Web site without ordering at least one book takes discipline indeed. It's as simple as
entering your credit card number and your address, dropping the book in the "shopping cart," and
clicking "order." If you have a book in mind, you can type in the title. If you have a subject in mind
(such as strategic planning) you type that in and click "search." There's more. How about a contest?
Perhaps you'd like a review of a popular book by either a critic or a customer. Even authors can
comment on their own works. And if you find a book you like, you'll also find a list of other books
that people have bought in addition to the one you're considering.
Amazon.com's sales went from zero to $15.7 million in 1996 and in the first quarter of 1997 hit $16
million. Amazon went public in 1997 at slightly under $20 a share. By mid-1998, its stock had been as
high as 100.
Source: Charles C. Mann, "Volume Business," Inc. Technology, no. 2 (June 17, 1997): 54-61;
Amazon.com Web site www.amazon.com, accessed May 27, 1998.
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Profile 7.2
Courtland Clubs
Courtland Clubs was an established tennis club in a medium-sized metropolitan location. It had been
in business for more than 25 years and had prided itself on the quality and aesthetics of both its indoor
and outdoor courts. Although its prices were high, the club had attracted a prosperous, upscale
clientele and had experienced steady growth. Courtland Clubs had developed a reputation as the "in"
club among the business and professional community. To a large extent, the social climate of the club
was more important to its members than were athletic opportunities.
In the early 1990s, Courtland's management team became aware that cross-training and a variety of
physical activity options were becoming more significant to its target market than the socialization
factor had been in the past. The management team feared that membership might start to dip because
many members viewed the club from a social perspective.
In analyzing its environment, Courtland recognized numerous growth opportunitiesbecoming a health

club complete with weight machines and general workout equipment; adding racquetball facilities;
installing an indoor running track; and offering year-round aerobic workouts. Courtland had the staff,
land, and physical and financial resources to capitalize on any or all of these possibilities, but other
clubs were already providing these features, and it appeared that the last thing the community needed,
or could support, was another health and exercise club. Courtland's owners felt they had responded
too slowly to environmental shifts and new consumer needs and were thus stuck in a losing situation.
The management team assembled to discuss the problem. One of them asked, "Is there any way we
can compete in the health club, racquetball, and running club areas given the present level of
competitive saturation?" The answer was perhaps, if the Courtland design was
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unique or special enough to attract users from existing clubs to its facilities. But how were they to
build such a club?
The answer lay in the distinctive competencies that Courtland had so carefully nurtured over its 25-
year existencequality facilities, luxuries, and a competent and helpful staff that catered to the wishes
of its unique (and growing) target market. With this competency in mind, the owners were able to
devise a strategic plan and direction and enlarge its offerings.
In its competitive situation, Courtland needed to recognize its areas of competence, determine whether they were still viable, and then proceed to
use them as the focus for evaluating environmental opportunities and strategic direction.
In some situations, however, distinctive competencies may need to be developed or nurturedparticularly if none currently exist, as is the case
with new businesses. Entrepreneurs analyze the competitive environment, scrutinize internal resources, and carefully and objectively decide
which areas are most fruitful for development. In this approach, the one Amazon.com pursued to a large extent, managers attempt to build areas
of competence.
Such a building or development process can be quite trying for both new and emerging small businesses. Essentially, managers should
investigate areas where they can create a meaningful competence, realizing that the competitive environment, the firm's internal capacities, and
the firm's reactions within its competitive environment dictate competencies. Consider the case of cybercafes (Profile 7.3) that purposefully
identify an area of competitive uniqueness and commit energy and resources to develop it. This area becomes a distinctive competence because
it meets the needs of today's fast-paced, connected society.
In spite of the difficulty in compiling an exhaustive set of competencies, Figure 7.1 lists nine of the more common areas of distinctive
competence likely to be recognized by emerging small businesses.
Quality is a key area of competence and one that is of growing importance to consumers. Here, a business offers consumers a product or service
that is of discernibly higher quality than the quality offered by the competition. Accordingly, consumers come to associate a quality image with
the business.
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Profile 7.3
Cybercafes: Coffee, Computers, and Comaraderie

Coffee cafes are the rage today. Apparently, people encountering the hustle-bustle lifestyle
of the late 1990s find relaxation in the casual, customer-focused style of these shops. The
downside, particularly from a business perspective, is the omnipresence of the shopsthey're
seemingly everywherewith little to distinguish one from another. True, Starbucks has a
strategy as it has coupled its operations with Barnes & Noble Booksellers, but how do
others compete and create a meaningful distinctive competence? The answera cybercafe!
Webolution Cafe in Albuquerque, WWW Cafe Inc. in Austin, and Bean Central in
Nashville have all created a unique style for their shops. They offer Internet access that
allows customers to check their e-mail while sipping their morning brew. The online
charges vary from shop to shop; for example, Webolution charges $4 for a half-hour
hookup. Customers now seek out these shops rather than those without such clever
technological options.
The commonality among cybercafes is their distinctive competence that they created
through a mix of coffee, computers, and camaraderie.
Source: Danielle Reed, "Takeoffs & Landings," The Wall

Street
Journal, April 24, 1998, p. W7.
Service often moves hand-in-hand with quality and refers to a business's efforts to aid consumers in their dealings with the business and its
products. The efforts to provide service may occur before a sale or when repairs and follow-up are needed after a sale.
Location is a factor that often dictates a firm's success and can be an area of considerable competence when recognized and exploited. Location
may affect a firm's visibility, its likelihood of attracting the target market, and its competitive edge over businesses offering similar products or
services.
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Quality Strong consumer orientation

Service Reputation and image
Location Personnel
Filling a special niche Price
Flexibility and adaptability
Figure 7.1
Areas of Distinctive Competence Commonly Recognized by Emerging Small Businesses
Filling a special niche is a particularly important competence and one that can be developed after careful analysis of the competitive situation.
A business may choose to enter an untapped market, provide unique services or products (and thus limit direct competition), or add aspects of
novelty or originality to existing products. Such extensions and variations must be focused on real needs of some segment of the market,
however. Providing a unique product that no one cares about or wants to purchase is counterproductive.
Flexibility and adaptability may be particular strengths an emerging small business can focus on that offer it a competitive edge over larger,
more formalized, and more rigid operations. For example, an emerging business may do custom work and thereby attract customers from
larger firms who don't offer custom services.
A strong consumer orientation is often promoted by smaller businesses, which, perhaps because of a less formalized, bureaucratic process, are
able to stay in closer touch with shifting consumer needs and demands and respond more quickly to them. Consumers are likely to feel that a
company's employees know them and are willing to adapt and modify their methods and operations to accommodate customers' individuality.
Reputation and image may be a function of a number of other areas, yet consumers often see their cumulative effect in a general or
encompassing way.
Personnel can be an area of competence when managers and other employees have extensive experience or knowledge, factors that are business
strengths. When customers recognize these strengths and believe they are superior, a distinctive competence exists. For example, two large
grocery stores both have experienced, knowledgeable workers. One store, however, is primarily self-service where customers place their own
groceries on the checkout conveyor and then sack them after they pay. The second store emphasizes personal interaction and help; employees
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sack the groceries, and the front of the carts opens at the level of the scanner so customers don't have to unload the cart. Both stores
possess employee-related strengths, but only the second has transferred that strength into a distinctive competency.
Finally, price, which is often stressed, is a tenuous competencypowerful yet remarkably fragile. Its potential as a competency may be significant
if competitors are conservative and new entrants into the market are unlikely. However, if a competitor is willing or able to alter its existing
price structure, this competency can be stripped of its value very quickly. Price is therefore often viewed as a rather short-term competency.
These nine areas are competencies only if a firm's customers perceive them as such. Perception is often more important than reality. Managers
may correctly feel that the firm's customer service is superior to that of the immediate competition, but service is not a distinctive competency if
customers don't perceive it as different from, and better than, that of competitors. Service is at best an unexploited strength, for a strength must
be built or developed into a true area of distinctive competence. Effectively marketing a strength may be the bridge to creating a distinctive
competency.
Relating Distinctive Competencies to Relevant Business Opportunities
Not all environmental opportunities are relevant business opportunities, as noted earlier, and not all business opportunities should be
exploited. Which relevant business opportunities should an emerging business choose to pursue? In general, management will select business
opportunities in those areas where they possess some unique or special advantage over competitors. In other words, a business should focus
on opportunities for which it has distinctive competencies.
The significance of this point is often overlooked or misunderstood. Managers frequently believe that if a relevant business opportunity is
present, they should try to capitalize on it even though it may be a poor use of the firm's resources. For example, a number of competitors may
be about to respond to the same opportunity, and some of these competitors may be better able to do so. To commit to an area in which a firm
is, from the outset, at a definite competitive disadvantage is poor business sense. Areas in which a business possesses a meaningful competitive
edge over its competitors are the areas that should be emphasized.
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In addition, leaders of new and emerging businesses must be sure that pursuing new opportunities will not threaten the main mission and focus of
the business. In other words, an opportunity may exist and the business may have the capacity to act on it, but its managers may decide that doing
so threatens the business in some important way.
Consider the case of Primordial, makers of Zobobrightly colored plastic linking toys that resemble genetic strands of DNA when assembled. In
the company's early years, it faced a most tempting opportunity when asked to include its product in the marketing efforts for the movie The
Lost World, the sequel to Jurassic Park. Reasoning that such a move would link their toy forever in customer's minds as a Jurassic Park spin-
off, Primordial's founders opted against this strategy despite its short-run promise. Instead, they emphasized their focus of making their own
brand, with its own distinct image and special approach to marketing. The opportunity offered by The Lost World could have potentially clouded
this focus and harmed the long-run growth of the business. 2
Sustainable Competencies
It is one thing to have or develop a distinctive competence. It is quite another to maintain it. The more successful a company is because of a
competence, the more competitors will attempt to imitate or improve on it. Anything a manager can do to sustain a competence and prevent
competitors from encroaching on its territory will go far in ensuring success for the business. Actions that can sustain a competence include
patenting a product or process, keeping formulas for products secret, advertising the product heavily to develop brand loyalty, and
developing unique containers and catchy slogans or product names that encourage customers to identify with the particular product or
company. Clearly, tangible resources as a source of distinctive competence are much easier to imitate compared with intangible resources
or capabilities as a source of distinctive competence.
Ben & Jerry's Homemade Ice Cream, Inc., is an example of a company that has worked hard to sustain its areas of competence. The flavors of
its superpremium, high-fat, expensive ice cream carry such exotic names as Cherry Garcia, Rainforest Crunch, New York Super Fudge
Chunk, White Russian, Chubby Hubby, and Coconut Almond Fudge Chip. The company
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also publicizes its adamant commitment to social causes. Many customers buy Ben & Jerry's ice cream partially because of the good taste and
catchy names and partially because of the company's reputation for involvement in social causes.
Some companies, such as Columbia Sportswear, shown in Profile 7.4, go to great lengths to protect their competencies. The press release
from Columbia Sportswear illustrates the effort it goes to in protecting its designs.
Few competencies are sustainable forever. Even IBM, previously the epitome of success in the computer industry, fell on hard times in the
early 1990s before rebounding in the mid-1990s. Declining sales occur repeatedly among real estate companies in medium-sized cities. For a
few years, one company dominates the community's sale of real estate; a few years later, another firm leads the pack; still later, another will
take over as number one. A real estate firm is able to ward off competitors for a few years because of its size or because its key executives are
well known in the city. The success of that firm, however, eventually fades when a competitor tries some other approach that customers find
appealing. The tenuous nature of distinctive competencies should prompt managers to search for ways to sustain their competencies.
Distinctive Competencies and Strategic Planning
The determination or recognition of a firm's distinctive competencies is one of the critical, culminating events of the analysis phase of
strategic planning. The distinctive competencies of the business become the focus or driving force behind selecting relevant business
opportunities, preparing mission and goal statements, and planning strategic actions.
It may be useful to refine the steps or processes that make up the analysis phase of the strategic planning model (see Figure 7.2). First,
environmental analysis yields a series of environmental opportunities, which are then subjected to the scrutiny of internal analysis to determine
if they are in fact relevant business opportunities. Additional analysis focusing on competitors and key internal strengths permits a firm to
clearly recognize its distinctive competencies (or pinpoint those most fruitful for development). Then, relevant business opportunities are
evaluated in terms of a recognized distinctive competence. Those opportuni-
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Profile 7.4
Columbia Sportswear Forges Ahead in Battle

against Trademark Infringers
Portland, Ore. (December 5,1997) Fervently protecting its products and brand image worldwide,
active outdoor clothing and footwear giant Columbia Sportswear Company® has forced
California apparel manufacturer Moose Creed to stop selling copies of its popular Half Moon
ShortTM. The Half Moon Short, a technical angling short, is part of Columbia's Performance
Fishing Gear collection.
Moose Creek's Safari Short so closely resembled the Half Moon Short that Columbia felt its
brand image and potentially sales of the Half Moon Short would have been compromised. Moose
Creek agreed to immediately cancel production on its Safari Short. ''Columbia Sportswear has
become a particularly attractive target for trademark infringers because our products perform so
well at retail," said company President and Chief Executive Officer Tim Boyle. "As we forge
ahead in our international expansion, it is imperative that we preserve our brand image and
product integrity, so we will continue to use every legal measure to protect our trade dress rights
from those who try to profit from our expertise."
Columbia's trade dress rights arise from its unique designs being so distinctive that they identify
the company as the source of the product. Columbia employees, independent sales
representatives, and distributors all over the world are trained to identify and intercept knockoffs,
and to immediately report them to corporate headquarters. Over the past five years, Columbia has
successfully halted more than 40 companies in four countries from selling knockoffs of its
popular outerwear.
Columbia Sportswear reports worldwide sales of $350 million in 1997, up from $299 million in
1996. Founded in 1938 in Portland, Oregon, Columbia Sportswear Company is the world's
largest skiwear manufacturer. Its active outdoor apparel and footwear is sold through more than
10,000 retailers worldwide.
Source: Columbia Sportswear Company press release, www.columbia.com/ columbia/company/

release3.htm, accessed May 29, 1998.
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Figure 7.2
Distinctive Competency Identification Process
ties most consistent with a firm's competencies are the ones that are actively pursued and become the focus for subsequent planning efforts.
A caveat: A business may succeed without a specific distinctive competence. In particular, this may be true if consumer demand is strong in
relation to industry supply; simply presenting the product or service to a ready market ensures at least short-term success. However, if business
returns are attractive and no barriers impede new entrants into the industry, there will undoubtedly be an eventual competitive shakeout. It is then
that the businesses with firmly established competencies have the greatest likelihood of survival.
Competitive Weaknesses
Although careful environmental and internal analyses enable managers to identify areas of distinctive competence, they also suggest areas
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of competitive weaknessthat is, an area of vulnerability in which competitors have a meaningful edge. In a highly competitive situation, one
firm's distinctive competency is often another firm's competitive weakness. Just as distinctive competencies are developed over time,
competitive weaknesses, too, typically evolve over time.
Throughout its business life, actions a company has taken or failed to take can accrue into competitive weaknesses. Once recognized, however,
competitive weaknesses can motivate the strategy process. Managers should respond in order to minimize, mitigate, or overcome areas of
distinctive weakness.
Consider the following example of how a business can respond to a competitive weakness and build a strategy for competitive success. Alan
Wolan started Five Fingers Inc. in 1995 on an investment of only $15,000. His concept was basic but timelysell advertising on free postcards, an
idea so popular in the trendy bars, restaurants, and health clubs in New York City that revenues reached $25,000 a month by the end of the first
year. As he considered expanding, Wolan found other entrepreneurs had tapped the same niche in other big cities, posing a threat he hadn't
expected. Even more bothersome, a large competitor, Max Racks, was ready to invade major metro areas. Confronted with impending and
crippling competition, Wolan faced the reality of a true competitive weakness. While Wolan lacked the money to expand his business, his new
rivalMax Rackshad deep coffers. Viewing Max as the common enemy, Wolan "partnered" with similar businesses in Los Angeles and Chicago.
Their new business, GoCard Postcard Advertising, became a network that soon expanded to include seven small companies in 14 cities. They
were able to expand quickly, attract clients nationwide, and fend off a bigger competitor. 3 A competitive weakness had spawned a creative and
winning strategic response.
Types of Distinctive Competence
Distinctive competencies can take the form of either resources, something the firm has, or capabilities, something the firm does. Consultants
must not only stress the need to develop distinctive competencies but also the need to develop complementary sources of distinctive compe-
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tencies. If a client can develop a resource as a distinctive competence, let's say a superior product, then the client must develop capabilities (e.
g., processes) that support the product. If a client can't develop both types of distinctive competenciesresources and capabilitiesnot only will
this limit the firm's exploitative opportunities, but it may also make it easy for competitors to imitate the competencies.
Consider EMI, Ltd., the company that introduced the CAT scanner, a machine used by the medical profession to, among other things, detect
cancer. (In fact, the EMI research engineer who invented the machine won a Nobel prize for doing so.) Initially, EMI was the only company
that knew how to make CAT scanners, and thus it clearly possessed a tangible resource (technology) as a source of distinctive competence.
Unfortunately, however, it did not have the capabilities (service and support staff) to exploit its resource. General Electric, with its
sophisticated manufacturing processes and a sizable sales force, saw the opportunity for CAT scanner sales. GE manufactured a modified
version of EMI's invention (to work around the patent) and eventually benefited most from the machine. 4
Difficulties in Assessing Competitive Weaknesses
Managers of emerging companies are often enamored of their products and businesses but may have great difficulty in recognizing competitive
weaknesses. This difficulty generally stems both from an unrealistic analysis of the competitive environment and from an inadequate internal
analysis. This is why it is so important that consultants stress a sound and objective analysis and why managers must be open and ready to
accept and respond to the outcomes of the analysis. As an outsider to the firm, a consultant may identify competitive weaknesses much easier
than an insider, but the identification must be performed diplomatically to avoid damaging a client's ego. A consultant should be as objective as
possible, citing factual information rather than relying on opinions. In addition, when identifying competitive weaknesses, a consultant should
focus on being constructive. Rather than discussing why the firm has a specific weakness, the focus should be on strategies to minimize and
eventually eliminate the weakness.
Indeed, one or two key areas of competitive weaknesses can, if unrealized and unattended, destroy the base of strength derived from a series
of distinctive competencies. Because few businesses are best at everything, a consultant can stress that having a competitive weakness is not a
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sign of failure. Instead, it signals that there are factors for a company to deal with in its development of goals and strategy for competitive action.
1. How can distinctive competencies be identified?
2. Can distinctive competencies really be developed as part of a strategy or are they simply something a firm has or doesn't have?
3. How necessary is it for a firm to develop a particular distinctive competence?
4. Pick a company that you know something about. Does it have distinctive competencies? How does or should the firm exploit them?
5. What kinds of competencies might we expect in the following businesses?
a. a shoe store
b. a grocery store
c. a pet shop
d. a heating and air-conditioning firm
e. a computer repair business
Notes
1. For a more in-depth discussion of competencies and their sources, see Arthur A. Thompson, Jr., and A. J. Strickland III, Strategic
Management: Concepts and Cases, 10th ed. (Burr Ridge, Illinois: Irwin McGraw-Hill, 1998), Chapter 4.
2. Alessandra Bianchi, "DNA-Like Toy Inspires Brand Creation," Inc., March, 1998, pp. 21-22.
3. Mike Hoffman, "Dear Max: Drop Dead. Love, GoCard," Inc., April, 1997, p. 28.
4. Charles W. L. Hill and Gareth R. Jones, Strategic Management: An Integrated Approach, 4th ed. (Boston: Houghton Mifflin, 1998), pp. 217, 220.
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Chapter 8
Growth Strategies for New and Emerging Businesses
We turn now to the action phase of the strategic planning process in which the actual strategic plan is developed. Growth strategies set the tone for
a business and become the focus for unit-level goals and strategies. The particular growth strategies that are implemented will depend on the
strengths and weaknesses of the firm and the nature of the firm's environment. After reading this chapter, you should be able to
• differentiate types of growth strategies common to emerging businesses;
• comprehend how a company's vision and mission, external and internal analyses, and distinctive competencies all impact its strategies;
• understand how strategic alliances can assist an emerging business pursue growth; and
• recognize the factors to be considered when choosing a growth strategy.
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A growth strategy should reflect how a business will behave in attempting to achieve its overall mission and secure a competitive advantage. It
is management's approach for positioning the business in response to external opportunities and threats, internal strengths and weaknesses, and
distinctive competencies the business has developed.
Small businesses often fail to develop an overall growth strategy and instead emphasize short-term goals and operational decisions. In such cases,
a firm's strategic orientation evolves as a reflection of past actionsit describes what a firm has done rather than prescribing what the business will
doand fails to reinforce a sense of future direction. We recommend that managers of emerging businesses take time to formally consider the
overall company strategies they desire.
Growth strategies enable managers to lead their business toward its vision and mission. Growth strategies can focus on markets, products, or
a combination of the two. Figure 8.1 illustrates how the pursuit of markets and products yields different growth strategies.
New and emerging businesses can realize growth by creating a competitive advantage in a specific product and market segment using a
focus strategy. They can also pursue growth opportunities by developing
Figure 8.1
Topology of Growth Strategies
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new markets for existing products using a market development strategy or developing new products for existing markets using a
product development strategy. Finally, emerging businesses can pursue growth by developing new products for new markets using a
diversification strategy.
Focus Strategies
New and emerging companies can pursue growth by creating a competitive advantage in an existing market with an existing product, an
approach typically referred to as a focus strategy and the most prevalent strategy used by smaller businesses. The appeal of pursuing growth
through a focus strategy is a company's ability to exploit a single competitive advantage, thus allowing a small business to emphasize what it
knows and does best. Small-business successat least initiallyis enhanced by limiting involvement to those areas in which owners and managers
have relevant business experience and an understanding of the dynamics of the competitive market situation. This is especially true when the
managerial staff is limited. Focusing on a single product and market niche allows busy managers to concentrate on the nuances of that particular
situation. Managers can orient and target their energies in a unique and focused direction and thereby improve their chances of staying on top of
relevant issues and competitive factorsthe primary reason why new businesses are often well advised to begin with a focus strategy.
An example of a focus strategy in an emerging business is seen in Kurzweil Educational Systems, a company started by Ray Kurzweil in 1996.
After owning a number of other companies, Kurzweil launched a company that sells educational software for blind students and students with
learning disabilities. Kurzweil Educational Systems, Inc. (KESI), developed the Kurzweil 1000 for people who are blind or visually impaired
and the Kurzweil 3000 for people with learning disabilities and reading difficulties. Both products work by scanning virtually any printed
document into a PC and converting the text into speech. The Kurzweil 3000 presents readers with a true-to-life, full-color image of an entire
page, including photos, graphics, and captions. The software then reads each word aloud in a realistic-sounding synthesized voice, and each
word or phrase is highlighted on the screen as it's being spoken, making it easy to follow printed material and reinforcing reading skills and
comprehension.
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The company focuses on a single market: students with disabilities. And it focuses on a single product line: educational software that converts text
to speech. Because 15 million people in the United States have some type of learning disability the growth potential of Kurzweil's market is quite
attractive. 1
By using a focus strategy, a smaller business can develop a number of potential competitive advantages over larger firms. Small businesses are
typically characterized by flexibility and adaptability, factors that enable a new or emerging firm to meet the special needs of its target market in
a more timely and responsive manner than can a larger business. A smaller business can exploit opportunities that are normally overlooked or
bypassed by larger firms. Profile 8.1 is an example of how a company has used a focus strategy to achieve growth.
Of course, implementing a focus strategy can be risky. If the present product or market remains dynamic, the strategy can lead to significant
growth, but if either the product or the market loses its vitality, the business is on tenuous ground and may need to be repositioned. The essence
of this orientation can be found in Mark Twain's caveat, "Put all your eggs in one basket and guard the basket."
Market Development Strategies
Market development strategies can be an effective way to achieve growth by extending existing products into new markets. These strategies can
be of two types. The first is geographical expansion whereby the product remains unchanged. The business continues to emphasize the customer
and product characteristics that have provided past success, but new geographical markets for existing product lines are identified and tapped. This
is a common way for emerging businesses to implement growth. In retail, for example, as one unit becomes successful, additional stores are
opened in other suburbs or cities.
The second method of market development is selling the same or similar products to new target markets. An example of this latter case is a
local Edward Jones financial services office. In reviewing current customer lists, the owner noted a predominance of men. Realizing a wide base
of professional women existed that most financial service businesses had not effectively captured, the owner decided to offer the same basic
services targeted
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Profile 8.1
The Blue Ribbon Car Wash

Sue and Jim Acres operate the Blue Ribbon Car Wash in a growing and affluent part of a
medium-sized city. They don't market the car wash to the general public nor would the general
public typically frequent it. Charging more than $40 per wash ($60 for a wash and wax), Blue
Ribbon caters only to those who drive an expensive car like a Mercedes, BMW, Audi,
Cadillac, Lexus, or Lincoln. Cars are accepted by appointment only and must be left for at
least four hours. The cars are washed and polished by hand using only top-quality cleaners and
waxes. They are cleaned and vacuumed inside, and fabric protector is applied if the owner
wants. Wheels are scrubbed and wire wheels are carefully attended towith a toothbrush if
necessary. For an additional charge, the engine compartment will be cleaned, the trunk
vacuumed, and the oil changed. Sue reports that initially business was slow. However, by
focusing on a specific market segment with a unique service, Sue projects business will triple
over the next two years. She is even considering whether they will have to extend their hours
and hire more people to meet rising demand.
to women. In fact, she periodically offers free investment seminars aimed specifically at women. Of course, investing by women is little
different from investing by men. In this case, therefore, the product or service was essentially the same but the target market was different.
One of the key advantages of a market development strategy is that the business maintains a high degree of consistency and stability. For example,
after a business has used a focus strategy successfully, the manager realizes additional markets can be captured using the same products or services.
In this case, the business adopts a market development strategy that has evolved from the successful implementation of a focus strategy. Because of
past success and a promising outlook, managers come to recognize the opportunities in geographically expanding the company's
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market or expanding to a new target market. An emerging business can pursue a market development strategy through (1) internal development,
(2) franchising, or (3) strategic alliances.
Internal Development
Internal development is an approach to implementing a market development strategy in which a business enters new markets on its own. The
manager of an emerging business identifies a new location; provides any necessary capital, equipment, and human resources; and manages any
new facilities. This approach has three major advantages. First, the manager has complete control over how new locations operate. This can
become an important issue, especially if a source of distinctive competence comes from the way in which a business is managed. Second, all
profits are kept by the business rather than sharing them with partners. Third, the company may realize economies of scale that occur when a
firm can lower its average cost of operations by increasing the size of its production or service facilities and its production volume.
While there are considerable advantages to expanding markets through internal development, there are also two major disadvantages. First,
market development via internal development can be very expensive; many small firms may not have the money to finance such an approach to
expanding into new markets. The second major disadvantage is that the small firm may not understand the nuances of markets in which it wants to
locate, such as brand loyalty to existing locally owned businesses.
Crystal Rug Cleaners is a good example of a company that successfully pursued a market development strategy using the internal
development approach after it had successfully used a focus strategy. An overview of Crystal is presented in Profile 8.2.
Crystal's basic strengths of service, professionalism, and knowledge of proper cleaning procedures were maintained and stressed in
advertising messages geared to the new market segment. Making such a strategic change requires care. The business must be sure that in
addressing new markets, the needs of the established markets are not forgotten or confused. Implementing a market development strategy
through internal development does add planning complexity but remains a logical means of fostering continued growth.
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Profile 8.2
Crystal Rug Cleaners

Crystal Rug Cleaners was started in an exclusive section of Florida's Gulf Coast in the early
1990s by Michael Richards. Initially, Richards's environmental assessment revealed a
promising opportunity. First, the market boasted extremely high levels of income. Homes
were large and expensive, and quality carpeting and rugs were common. Although there
were a number of cleaning firms in the area, none had established themselves as quality
businesses specializing in carpeting. The upper-income market was reluctant to entrust its
cleaning needs to most of the operations already doing business, particularly because
incorrect cleaning methods can damage or ruin expensive carpets. Richards trained
extensively in cleaning methods and techniques, including those unique to high-grade and
Oriental carpets, and Crystal Rug Cleaners was licensed by the National Institute of Rug
Cleaners, the first and only cleaner in the market area to earn such a distinction. To highlight
his competence and expertise, Richards limited his firm's activities to carpet and rug
cleaning. By distinguishing himself from his competitors and focusing on a single product/
market orientation, Richards made his business prosper and grow.
Within three years, he had saturated his current market, thus diminishing the opportunity for
additional growth. Using excess profits, Richards decided to establish satellite operations in
nearby communities that offered the same services he had so successfully provided before.
The expansion did not occur piecemeal but was carefully planned. Richards made
supportable projections of increased demand for each new market and budgeted his costs
and returns accordingly.
Franchising
If a company doesn't have the resources to pursue market development on its own, or if the manager desires rapid expansion, franchising
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may be considered. Franchising occurs when a businessthe franchisergrants exclusive rights to another individual or businessthe franchiseeto use
its name or services. Becoming a franchiser has several advantages. First, fewer resources are required to develop markets, although the costs to
initially set up a franchising system can be quite high. Second, because markets can be developed faster, economies of scale can be achieved in
areas such as advertising, distribution, and product development. Third, selling franchises to franchisees creates highly motivated owners of
individual franchises, who often invest considerable funds and time to make their franchise work. Further, the added number of units creates
both visibility and respectability as customers see the units on more and more street corners. The major disadvantage to the franchiser is reduced
profits and loss of control. For a company whose distinctive competence is quality, such as Crystal Rug Cleaners, franchising has to be pursued
with great care to ensure that quality is being maintained.
Strategic Alliances
Many times a manager who wants to aggressively pursue market development realizes, after assessing the firm's relative competitive strengths,
that the firm doesn't have the necessary resources or capabilities. In these instances, rather than forgoing pursuit of a market opportunity, the
manager may consider forming a strategic alliance with one or more other firms. Two or more businesses in strategic alliances share resources or
capabilities in areas where each is distinctly qualified. This can be an effective growth strategy when those in the alliance contribute in their own
areas of strength; businesses choose to work with each other in fact when their strengths complement each other. A strategic alliance allows
partners to share costs and move forward in a highly efficient manner, but it works only when each partner brings valued strengths to the alliance
and can trust other participants to do their part.
Strategic alliances are particularly effective growth strategies for new and emerging businesses when they possess distinctive competencies but
don't have the ability to exploit them. The strategic alliance can provide this ability and thus build a true competitive advantage.
Although strategic alliances can be used in focus strategies and in product development strategies, their most frequent and logical use in
emerging businesses is for moving from an existing market into new markets. The benefit of strategic alliances can be seen in Profile 8.3.
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Profile 8.3
ModaCAD, Inc.
ModaCAD, Inc., is a small software developer with a potentially valuable distinctive
competence. The company spent several years developing Project New York, a virtual mall on
the Internet where shoppers can walk and visit stores whose layout and decor are almost identical
to those of the actual stores. The program produces 3D images of clothing and other products that
shoppers can purchase through their home computer. Shoppers can click on a rack of clothes, try
something on a mannequin, and even click on an accompanying article of clothing from another
store to create a whole outfit.
After focus groups told ModaCAD it would be fun to take friends along when shopping,
ModaCAD now lets two users visit a store at the same time, shop for clothes, and make
comments in a chat area on the computer screen.
Although ModaCAD had a distinctive resource competence, it also had two problems: (1) it
didn't have the capability to mass market its product, and (2) the program required hundreds of
thousands of coding lines to be loaded onto the user's home computer. How would ModaCAD
convince consumers to load such a large program on their home computers to shop the virtual
mall?
Because ModaCAD didn't have the capability to exploit its distinctive competence, its
management decided to pursue a strategic alliance with Intel Corporation to provide the missing
resources needed to make Project New York a success. Intel has convinced many computer
manufacturers to produce its machines with the ModaCAD software already loaded. In addition,
ModaCAD's software has been carefully developed for use on a new generation of Intel chips
that haven't yet reached the market. Clearly, ModaCAD has used a strategic alliance to pursue
growth opportunities that would have been extremely difficultif not impossibleto pursue on its
own.
Source: Frederick Rose, ''ModaCAD Aims to Bridge Real Gaps in

Virtual
Mall," The Wall Street Journal, May 14, 1998, p. B6.
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Product Development Strategies
In contrast to market development, product development strategies stress variations or improvements in a firm's products, which are introduced
to existing markets. Managers hope that the positive image customers have of existing products will carry over to the new products. This
growth strategy can be pursued through either incremental or radical product development.
With incremental product development, a firm makes modifications to existing products in current markets. Present customers (with
assumed loyalty) are maintained and targeted while product variations are introduced. Incremental product development involves product
variations and improvements but no overriding change in the fundamental product.
Radical product development, on the other hand, seeks so novel an alteration of the existing product that a totally new or different product is
created. With radical product development, existing products are not eliminated; growth comes from sales of both the derivative product and
the existing one. The same customers may buy both the existing products and the new products.
Although product development is generally assumed to be a feature of larger firms with well-supported research and development staffs, many
contemporary product advances have come from emerging entrepreneurial companies. Advances in microcomputer hardware and software are
common examples. Emerging businessesworking intensively and hands-on with a particular product every dayoften generate meaningful
product innovations.
A product development strategy may be adopted by service companies as well as by manufacturers. For example, Copper's Cabinetry operated
for four years as a fledgling operation that specialized in building and renovating closets in customers' homes. Today, operating as Copper's
Consultants, it advises harried, time-conscious clients how to organize their life to eliminate daily time wasters. The service includes
everything from redesigning and rearranging wardrobe closets with customized modifications to adding mirrors to shower stalls so that
shaving and brushing teeth can be done while showering. Consumers are willing to pay for the added control they gain over their time and
routines. The company's business is steadily increasing among dual-income, upper-middle-class households.
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One reason product development is so attractive is the possibility it offers for high returns. Introducing new services or products can bring big
profitsat least until competitors recognize and respond to the changes. But significant risks are also present. Being on the cutting edge demands a
careful and accurate reading of environmental trends as well as a timely and cost-effective response.
Diversification Strategies
Because a company pursuing a diversification strategy will enter new markets with new products, diversification strategies encompass both
market and product development. Although a core area of concentration may still command the bulk of the business's energies, the business
is extending into other products, markets, or services.
A business may move to a diversification strategy for a number of reasons, but an emerging business typically diversifies for growth-related
reasons. In other words, managers realize that excellent opportunities for continued and expanded growth exist by moving into additional areas
of business.
Related Diversification
Diversification can be of two types: related or unrelated. In related diversification, the new business has some tie to the existing business.
Strategists refer to this tie as strategic fit. Strategic fit can be product related or process related. If the new business is product related, it may be
within the same general industry as existing products while still being substantially different. For example, a software development company that
makes educational software may decide to create financial software. Here the strategic fit is software development products even though the
specific market and the nature of the products are quite different. In process-related diversification, the strategic fit is an internal process, skill, or
competence that can be transferred to the new business. For example, a growing business that produces plastic fittings for industrial products
realizes that the process of forming the fittings is equally applicable in such consumer products as garden hose connectors. Accordingly, it
extends its
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business into an entirely new area, offering a new product directed to a totally different marketa full-line garden equipment manufacturer. In
both product-related and process-related diversification, there is a key logic or strategic fit between existing and new business ventures.
Many experts suggest that emerging businesses, because of their size, are wise to expand where there is some logical relationshipa strategic
fitbetween existing operations and desired areas of diversification. A business is at extremely high risk when its expansion extends beyond
its realm of experience or demonstrated competence.
Again, Crystal Rug Cleaners is a meaningful example. Crystal grew and prospered by selecting meaningful niches and selected growth
strategies. When Richards realized that Crystal's level of professionalism and quality would prompt consumers to trust Crystal with other
carpeting services, he considered diversification. Given the company's quality reputation, Richards decided to expand into full-line
commercial cleaning services. This meant that new markets had to be tapped and new skills developed. Additional employees were hired and
special equipment and supplies were purchased. Within a year, commercial cleaning services, a logical area of complementary growth, were
contributing nearly as much revenue as the original carpet cleaning business.
Unrelated Diversification
Although unrelated diversification may be less common and riskier for an emerging business, it is, nonetheless, a strategic option. At times,
opportunities arise that are appealing even though totally unrelated to the existing business. Often, such unrelated diversification is more
spontaneous than related diversification, but unrelated diversification may be a well thought out and conscious strategy to avoid putting all one's
eggs in a single basket. The owner of a successful and growing insurance business, for example, realized that his growing cash flow could
underwrite one or more additional ventures. As a hedge against the volatility and threatened regulatory emphasis of the insurance industry, he
decided to invest in a multiunit restaurant franchise.
Diversification can be extremely beneficial either when the existing product or service is risky or when dark clouds are gathering over the
product. Diversification has the potential of offsetting possible downturns in other products. Regardless of whether diversification is related
or unrelated, it is a strategy that can yield high returns if done well.
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Selecting an Appropriate Growth Strategy
Given the four general growth strategies available to emerging businesses, managers must decide which are the most appropriate for their
particular situation. Clear, obvious answers are rare, and exceptions are common. However, two factors may help to determine when each strategy
is most appropriatethe growth potential of the company's industry and the firm's relative competitive strengths. Industry growth potential must be
assessed not only in the present but projected over the firm's planning horizon. A careful and thorough environmental analysis should provide
enough information to decide if industry growth potential is relatively strong or relatively weak. Much of the material in Chapters 3 and 4 applies
here. Managers should consider the interplay of industry growth and competitive strengths when selecting a strategy.
High-Growth Industry Situations
The most appropriate strategic decision for an emerging firm in an industry that has high growth potential is to continue with a focus strategy. In
this case, rather than considering expansion into new areas, managers should invest resources into its existing industry to achieve future growth.
Because many emerging companies have limited resources, investment in a different industry would take resources away from a firm's current
industryan industry that has already exhibited growth and in which the firm has already gained expertise.
A market development or product development strategy may be effective under high-growth conditions, but a business must be careful
before embracing either of these strategies. Generally, an emerging business would only consider product or market development if it has
distinctive competencies that can be readily applied to new products or markets.
In cases where a firm faces a high-growth market but doesn't have sufficient resources to capture that market alone, franchising or strategic
alliances can resolve the dilemma; the firm achieves growth by partnering with other firms. Partnering through franchising allows the business to
be replicated over and over with franchisees, and a strategic alliance with another firm provides assistance in the manufacture and/or distribution
of the product.
Firms following a focus or strategic alliance strategy typically have competitive strengths or distinctive competencies. A firm in a high-
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growth industry, however, may still achieve significant growth without any competitive strengths. Demand may be so strong that any firm able
to deliver the desired product to customers will succeed. Because such a rosy condition is always temporal, care must be exercised here.
Eventually, industry growth will begin to stabilize and subside, and those businesses without competitive strengths and distinctive competencies
will be most vulnerable. Accordingly, emphasizing company strengths during times of growth can be a prudent and proactive measure.
Lower-Growth Industry Situations
Market development and product development strategies become more relevant when a manager's analysis of the industry environment suggests
that growth may be or soon will be tapering off. Then the firm capitalizes on one or more of its competitive strengths to expand and grow.
Expansion may be through the development of new products to sell to existing target marketsproduct development. Or the firm may find ways to
sell existing products to new target marketsmarket development. In either case, the firm's sales should increase in spite of slowing industry growth.
If industry growth is clearly on the wane, diversification must be considered. The manager must reconsider the environment and assess whether
the company has competitive strengths that could be applied in new industries. Realistically, diversification is probably the least likely strategy
for emerging firms and is certainly one of the riskiest strategies a business could adopt, although significant company strengths, in terms of
processes or products, can often be the key to related diversification efforts. In such cases, the manager redirects the firm's efforts to new
products and target markets while keeping some tie to the current operation.
Unrelated diversification may be considered in some rare circumstances when the manager determines that completely different challenges should
be considered. The unrelated diversification may be a defensive move when the manager feels that the current industry is threatened, or it can be
an offensive move when the manager realizes that excess funds need to be invested outside the current industry. The latter case may arise when
government regulation threatens an industry or when demographics or other social changes signal severe problems in the future.
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In developing a strategic plan and recommending appropriate growth strategies, the consultant must assess future growth potential and
growth-related opportunities. Remember that growth potential is a function of environmental factors, internal strengths and weaknesses,
and managers' attitudes. After carefully examining these considerations, the consultant may wish to proceed with a plan or reevaluate
growth projections.
The consultant must also help the client recognize the importance of controlled growth. Many small businesses want to pursue growth. Growth
is exciting, challenging, and may provide managers with a sense of prestige, but these are the wrong reasons for such a pursuit. Rather than
pursuing growth simply for excitement or enhancing egos, managers of emerging businesses should have a rational purpose, such as improving
the company's long-term competitive position, for engaging in the pursuit of growth.
Companies that experience growth usually have to make several sacrifices. One short-term sacrifice may be profit. Many emerging businesses
have impressive revenue growth. Profitability, however, may be at the same level or even lower than it was before growth began. When a
firm commits to a growth-based orientation, resources have to be committed to product and/or market development so that in the short run,
growth may not lead to profitability.
In addition, growth has some serious risks. Success may put a company out of business if it grows too fast. Examples abound of companies that
have been forced to close their doors because they grew too fast. Let's assume a small retailer had a competitive advantage in a reputation for
service. As the company grew in size, its service eroded because employees were too busy trying to keep up with demand rather than providing
excellent service. The reputation that made the company successful is now the reason the company is out of business.
Given the potential risks, why do so many firms still desire growth? If planned correctly, growth can provide benefits by increasing the
company's competitive position, power base, survivability, cost position, and long-term profitability.
A consultant can help to guide a company to achieve beneficial growth rather than detrimental growth by stressing balance. Proper planning
for growth requires focus not only on growth goals but also on operational goals. The consultant should emphasize that the firm needs to
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achieve controlled growth. Rather than increasing in size as fast as possible and worrying about how to manage the growth at a later date,
the consultant needs to emphasize balance between resources allocated for growth and resources allocated for effectively managing growth.
1. Is it necessary to have a strategic approach to growth? Why or why not?
2. Explain when one growth strategy would be preferable to another.
3. Select the growth strategy most appropriate for each of the following:
a. a new computer chip manufacturer
b. a real estate firm dealing with commercial property

c. an older grocery store located in a growing community
5. What are some of the advantages and disadvantages of forming a strategic alliance?
Notes
1. www.kurzweiledu.com, accessed November 9, 1998.
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Chapter 9
Setting Goals
A company's first action stepdefining its strategies for growthis based on an analysis of the firm's capabilities and its environment. Yet simply
determining broad strategies is insufficient. Those strategies must be converted into goals for the business as a whole and for the units within the
business. The goals then serve as the basis for more specific strategies and tactics. Determining specific goals for a business is the focus of this
chapter. (The differences between goals and objectives here are negligible, so we use the terms interchangeably.) After studying the chapter, you
should be able to
• describe the relationship between goals on the one hand and the vision, mission, and growth strategy of the business on the other;
• visualize the process of determining goals;
• differentiate between horizon goals and near-term goals;
• understand the difference between companywide goals and unit goals; and
• segment goals into action plans.
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Benefits of Specific Goals
Suppose you and a friend are leisurely driving around the city some Sunday afternoon, and you realize that you have no idea where you are. Are
you lost? The answer is no. But suppose one of you suddenly says, "It's four o'clock! We were supposed to be at a meeting fifteen minutes
ago!" Now you are lost.
The leisurely Sunday afternoon drive was fine as long as the only goal was to have a good time. But once you realized you had to be somewhere at
a certain time (and you were late), you looked around for landmarks or asked directions. The point is that only if you have a specific goal to strive
for do you take the actions necessary to achieve it.
This analogy speaks clearly to the business world. One of the fundamental dangers for new and emerging businesses is that they will simply
"drive around," serving customers and working at a frenetic pace but lacking clarity of direction. Business goals provide the needed clarity
and direction. Once a goal is set, performance can be measured in terms of that goal. Thus, a goal is simultaneously a planning tool and a
control toola planning tool because it must precede the actual development of a plan and a control tool because it is a preset standard against
which performance can be measured. If goals have not been achieved, corrective steps may be taken to improve performance.
Goals also motivate employees. Achievable goals, in fact, can become a rallying point for the entire company. Recently, the owner of a small
manufacturing firm attributed her firm's ability to weather some tough economic and competitive times to the fact that the employees knew
where the company was headed. They knew what the owners expected and had a good sense of what was likely to happen. She noted that
sharing goals built a sense of identity and was convinced that the open sharing of goals fostered a "we are in this together" spirit that helped the
firm rebound from some bleak days.
Characteristics of Good Goals
If goals are to have meaning and the process of goal setting is to work, certain basic rules, guidelines, or considerations must be noted. In
general, these rules apply to all types of goals.
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First, goal statements should be phrased in terms of outcomes or results rather than processes. Managers must focus on desired accomplishments,
not the series of activities undertaken to achieve these accomplishments. There is a world of difference between saying, ''This week we will work
on the budget," and "By the end of this week, the budget will be completed."
Second, goal statements should be clear, specific, and, to the extent possible, quantifiable or measurable. The clearer and more precise the goal,
the greater the likelihood that it will be pursued and attained. It is simplistic to say that you cannot control what you do not measure. Yet if
managers want high levels of performance from workers, the workers have to understand precisely what end result is expected. General
platitudes are not acceptable. In fact, to be most useful, goals should be cast in terms of percentage increases from a baseline. Thus, a goal of a
5 percent increase in sales compared with last year is better than saying that we want to increase sales next month.
Third, effective goal statements should be challenging yet realistic. Challenging goals are essential for emerging businesses and growth-
oriented owners. Goals that are too simple or too easily reached cheat the business of its full potential. They can lead employees to feel
underutilized in their jobs and contribute to declines in morale and job satisfaction. On the other hand, goals that are too lofty may quickly
be perceived as unreasonable or unrealistic, and employees will not even try to achieve them.
Finally, goals must be communicated throughout the organization. Regardless of how impressive a goal statement may be in meeting the
foregoing criteria, its potential to influence behavior is lost if it is not communicated to employees. Many managers understand the value of
open communication and include their employees in the goal-setting process, which not only enhances the goals but becomes a key to
motivation. The empowerment movement of recent years focuses on mutual understanding, involvement, and agreement between owners
and employees about goal setting.
To summarize, goals should be
• phrased in terms of outcomes rather than actions;
• measurable;
• challenging yet realistic; and
• communicated.
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How Are Goals Created?
Although setting viable goals is largely a judgmental process, it should not be done by the seat of the pants. In part, goal setting should be based
on historical data, but to a greater extent it should be based on the analyses discussed in Chapters 4, 5, and 6.
The focus of goals may change from time to time. Suppose, for example, that sales have increased as planned over the past several years, but
costs have risen dramatically. The goal for the next period may focus on cost containment. Sales increases may still be encouraged, but the
primary emphasis will be on reducing expenses per sales dollar.
Often, a specific numerical goal will be a compromise among key management personnel. The marketing manager may suggest a target increase
in sales of, say, 10 percent. The controller may be more pessimistic and feel that 6 percent is the most that could be expected. The production
manager may be pretty sure that 7 or 8 percent is the maximum increase obtainable without a substantial capital outlay. The owner, working
with these managers, encourages each person to offer a sales forecast for the coming year along with related information, and together they set
final goals for the year. Open communication becomes a key to meaningful compromise.
Conflict among Goals
No business will have a single overriding goal. All groups, all businesses, all individuals have multiple goals. Many of the goals are congruous,
but some will be in conflict. For example, a goal to be a successful business owner sometimes conflicts with a goal to be a successful parent.
Managers of a business may even have mutually exclusive goals. One manager may have a goal in conflict with another manager, or a manager
may have two goals that conflict with each other. In either case the exclusivity means that one cannot be achieved without serious damage to
the other. For both new and emerging businesses, conflict among goals can affect the strategy of the firm. One group of managers, for example,
may want to commit funds to introduce the firm's products into new markets. Another group may be convinced that funds need to be allocated
to technological improvements and product modifications to keep up with changes in the industry. Both groups argue that their goal is the
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best way for the business to achieve growth. Because of limited funds, both sets of goals cannot be pursued so the conflicts must be resolved
or internal dissension and indecision can cripple the business.
Goal Priorities
Everyone establishes priorities because people can never attain all that they want to attain or do all that they want to do. Thus, people learn to
prioritize and determine which of life's objectives are most important. Businesses too have multiple opportunities and multiple goals, and it is
difficult, if not impossible, to achieve all of them. This is particularly true for the emerging business where growth may present an array of
opportunities, making it necessary, then, for the company to set priorities for its goals. Owners may decide that the major emphasis this year will
be on hiring new employees because the major emphasis last year was on expanding into a new area. Sales may have increased dramatically, but
now personnel needs must be addressed. Although growth and expansion received top priority last year, they now must take second place to
human resource considerations.
Setting priorities for goals is particularly important in product development. If a firm has a number of products that could be marketed, it may
decide that products A and B will receive attention and funding next year and products C, D, and E the following year. Similarly, the firm
may budget to replace some old equipment this year and schedule the remainder for replacement two years from now.
Levels and Time Frames
Goal setting is often seen as a complex process, and owners of small firms bristle at the thought of wading through the necessary procedures. This
is unfortunate because goal setting need not be overly cumbersome.
All goals are not the same; there are different levels and types. While such distinctions may appear to complicate the goal-setting process, they
are the basis for a logical system that allows the power of strategic goal setting to emerge.
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Levels of Goals
As noted in Figure 9.1, two levels of goalscompany and unitare typical for new and emerging small businesses. Company goals relate to the
performance or accomplishments of the overall business. Unit goals relate to the performance or accomplishments of one or more departments or
units within the business. Figure 9.2 shows how company and unit goals differ yet relate to each other. A company goal establishes certain
demands and requirements that need to be reflected in the unit goals.
For a manufacturing business to secure a 5 percent growth in revenues (company goal), for example, marketing must develop a more
effective advertising and promotion scheme, operations must increase its capacity, the sales force must secure new contracts, and human
resources must hire and train new workers. All these activities take place at the departmental level. Unit goals, then, help individual workers
realize how their specialty fits into the overall business plan.
Unit goals must mesh with one another and with the overall business goals, but, unfortunately, contemporary business is plagued by the lack
of integration of unit goals. For example, the marketing department may develop new promotional programs without much regard for how
they affect other functional areas or the overall efficiency of the business. The marketing department may do an excellent job of securing
new contracts or additional orders but, in the process, outsell the company's capacity to produce on time. Each unit must see itself as a part of
the whole business. All must recognize that each part complements the other.
Figure 9.1
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Figure 9.2
Company goals must precede unit goals. Company goals are established and then communicated to units. Unit managers then develop goals
and review them with the owner to ensure that they fit properly with other unit goals and make an appropriate, balanced contribution to the
business goals.
Goal Time Frames
New and emerging small businesses typically establish goals within three different time frames, as shown in Figure 9.3. These three
time frameshorizon goals, near-term goals, and target goalsare interrelated and interdependent.
Horizon goals focus on accomplishments expected over the course of the firm's overall planning horizon. The longer-time nature of these goals
means they involve relatively high levels of uncertainty. Horizon goals therefore tend to be broader and less specific than other types of goals.
Near-term goals are established to delineate results or accomplishments expected within the firm's next operating cycle. Although that
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Horizon Goals
(Cover the firm's planning horizon)
Near-Term Goals
(Cover the firm's next operating cycle)
Target Goals
(Cover the short run; i.e., weeks or days)
Figure 9.3
Goal Time Frames
period is industry and company specific, normally, near-term goals deal with the next six months to a year. Many companies, in fact, refer to
these goals as short-term goals and assume that they are for one year.
From a planning perspective, horizon goals should be established before other goals. Often there is a strong temptation to think of the shorter-
run, near-term goals as a starting point. If horizon goals are set first, however, the business must necessarily be analyzed with an eye on the
distant future. Thus, horizon goals must reflect the company's vision (discussed in Chapter 3). All subsequent plans aim toward the longer-term
goal rather than being unduly constrained with meeting near-term profitability or sales targets. At the very least, horizon goals should be
developed for sales dollars, market share, dollar profits, cash flow, and return on investment.
Near-term goals are those portions of the horizon goals that can logically be obtained in a short period of time. For example, if the planning
horizon for a manufacturing firm is five years and the horizon goal is to increase sales by 50 percent, then the near-term goal could logically be
to increase sales by 10 percent over the next year. Similarly, a restaurant manager may have a three-year planning horizon and may want to have
a new restaurant in place at the end of the three years. A near-term goal may be to accrue $100,000 in interest-bearing accessible funds by the
middle of the current fiscal year while keeping the current ratio above 2.25. Near-term goals are the in-progress portion of horizon goals.
Once horizon and near-term goals have been determined, the final goal-setting task is to segment the near-term goals into target goals. Target
goals refer to very short-term goals that are quite specific as to time and
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measurability. Target goals may generate actions that must be completed in a few weeks or even a few days.
Suppose a growing real estate business in Indianapolis has as one of its horizon goals to increase its market share for residential sales by 10
percent within five years. This goal may then be segmented into the near-term goal of increasing market share by 1 percent in year one, 2 percent
in each of years two, three, and four, and 3 percent in year five. Target goals are then developed to refine the near-term goals into smaller, more
workable unitsincreasing home sales by 10 percent in the first quarter, increasing listings by 20 percent, increasing sales per broker by 5 percent,
and any other goal that will ultimately lead to the first-year 1 percent increase in market share. Finally, specific actions are developed to achieve
those target goals.
The key to target goals is to make them very specific, measurable, and attainable. Once all the target goals are defined, they must then be checked
to ensure that they mesh with the larger or longer near-term goals. Some target goals will change monthly, some will change weekly, and very
specific targets might change daily. Although target goals should be included in the strategic plan, they should be physically easy to remove
(included in an appendix, for example), because the targets may change frequently. But it is still necessary to write down the target goals and
their related activities in order to communicate them, get commitment, and help direct employees.
The Goal Segmentation Process
The process of strategic goal setting is the same for company-level and unit-level goals. In fact, there should be horizon and near-term goals for
both company and unit levels (see Figure 9.4). Target goals are generally developed for the units of the company.
Unfortunately, many small business owners develop goal statements that are so broad and ambiguous that they are merely platitudes. These dream-
list approaches do little to provide a clear focus and direction for business activity or to offer meaningful indicators of business progress or
necessary corrective actions. Moving incrementally from horizon to target goals forces owners to work through this potential goal stalemate and to
produce a series of relevant and significant target goals.
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Figure 9.4
Target Action Plans 1
Once a set of horizon, near-term, and target goals has been developed and communicated, many owners of emerging firms think that planning has
been accomplished, that further refinement is unnecessary. These managers will rarely see their goals reach fruition and will be understandably
frustrated at having wasted so much time on the process. A target action plan, outlined in Figure 9.5, forces them to move beyond this scenario. It
itemizes a series of tasks to be prescribed and accomplished in meeting each target goal. Figure 9.6 shows the target action plan for Uplands
Supply, Inc., a growing manufacturer of ink cartridges used in copiers, fax machines, and printers. Uplands decided to use an advertising
specialty campaign to promote its sales of ink cartridges to manufacturers of equipment that use the cartridges.
The first step in the target action plan is to restate the target goal in clear, precise, objective, results-oriented terms. In the Uplands example, the
target goal is to develop an advertising specialty campaign within the next month, part of a larger near-term goal to increase sales by 15 percent
over the next year. Even though the decision to use the advertising specialty approach had already been made, staff commitment to this
approach has not been secured. With the target goal firmly in mind, a series of important action steps come into play, including determining any
barriers that must be overcome, determining specific tasks that must be done, setting deadlines for completion, and identifying elements of
feedback to use to assess results.
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Figure 9.5
Barriers
Barriers are the obstacles or bottlenecks that must be overcome or circumvented before target goals can be reached. It is critical that owners take
the time to consider, in detail, the barriers that stand in the way of reaching target goals. Barriers typically relate to human resources, other
resources, and time. The three types of barriers are (1) insurmountable
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Figure 9.6
barriers, (2) barriers that can be overcome but only with a concerted redirection of effort toward the barrier, and (3) barriers that can be hurdled
while enroute to the target goals.
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The first type is a barrier or a series of barriers so overwhelming and significant that it is clear the target goal will never be attained. Suppose, for
example, a company has a target goal of completing a marketing research project by the end of the month. If the two primary researchers on this
project suddenly resign, the goal becomes unreachable. It is important to recognize an insurmountable goal early in the action process before
you waste important resources and become frustrated. When you hit an insurmountable barrier, you need to abandon your target goal and
consider alternatives.
The second type of barrier must be resolved before target goals can be addressed. This kind of barrier forces the owner to abandon the target
goal temporarily and focus on overcoming the barrier. For example, if a machine is not performing to specifications, the target goal must be set
aside and energies directed toward repairing the machine or acquiring a new one. Only then can the original target goal be addressed.
The third type of barrier is not as pervasive or overwhelming but still requires some sacrifice of resources or time. Owners must be aware of
these sacrifices and be open and responsive to addressing these difficulties and explaining likely benefits if they are overcome. In the
Uplands Supply example, the owners must convince the marketing department that time spent on advertising specialties is worthwhile and
meaningful. They must also let the staff know what is expected of them, allaying their fears and apprehensions and encouraging a positive,
supportive attitude.
Action Tasks
Action tasks are the specific tasks that must be completed if target goals are to be achieved. They are the final refinement in the process of
segmenting goals into smaller, incremental units. These tasks, some of which may focus on dealing with barriers, are the most basic and
narrowly defined. Each necessary action task must be noted. Once action tasks have been prescribed, they must be arranged into a logical
sequence according to their priority. The specificity of the actions depends on the owner's confidence in employees. If employees are
knowledgeable, dedicated, and innovative, action tasks are best stated in broad parameters, leaving it to the employees to determine
specific activities. Conversely, if employees are new or unskilled, they may need more specificity and direction.
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Deadlines
It is important to establish deadlines, or completion dates, for each task in the sequence. The deadlines must be real, not arbitrary, so employees
treat them seriously. Imposing an artificially early deadline only frustrates employees, who no doubt have a number of simultaneous
responsibilities. Deadlines should also be meaningful. Those for the most critical tasksones that if delayed will cause severe problemsshould be
set first. Deadlines for other tasks can then be assigned and arranged according to their priority.
Feedback
Some method of securing feedback should be determined in order to evaluate whether a task has been completed or is progressing as required.
Feedback needs to give the owner a solid feel for the success of the task. Feedback regarding individual tasks may be easily identifiable, such as
when an employee obtains a contract, or may be more qualitative, such as favorable comments from customers or an apparent increase in the
ratio between sales calls and sales dollars. Monitoring feedback forces the owner to concentrate on action tasks and evaluate efforts to meet each
part of the action task sequence. In the Uplands Supply, Inc., example, action tasks are listed in sequence according to their priority along with
deadlines and a means of evaluative feedback for each.
The Integrative Goal Model
Thus far, we have identified four elements of strategic planning. First, the firm's mission and vision must be determined. Then, a broad
situational analysis is performed, allowing the business to recognize its threats, opportunities, strengths, weaknesses, and relevant
competencies. Companywide strategies must be developed, based on opportunities and threats, distinctive competencies, and the overall
growth strategy chosen. In the next step, a series of goals is developed in the form of written, measurable goal statements. This series of goals
clearly and specifically designates desired results. Finally, a target action plan is enacted to detail the process of bringing the goal statements
to fruition. Figure 9.7 outlines this integrative goal model.
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Figure 9.7
Goal setting is not an easy task. As many key people as possible should be brought into the goal-setting process even though the process can
generate conflict among them. If one person sees that a redefined goal deemphasizes a preferred project, conflict can arise.
Consultants must not rush this process. A number of iterations may be necessary before finalized goals are reached. Communication is all-
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important. In working with clients, we occasionally suggest the mantra, ''Communicate, communicate, communicate." Setting goals brings with it
the need to consider changes in how the company operates to meet those goals, especially true in emerging companies. Because growth is
occurring or is desired, managers must continually encourage employees to adapt to new strategies, new structures, and new goals despite perhaps
a natural resistance. Thus, the goal-setting process must be handled carefully and with constant attention to the company's vision and mission.
We recommend focusing on the characteristics of good goals. Goals should be phrased in terms of outcomes rather than processes, they should
be measurable, and they should be challenging yet realistic. By focusing on outcomes, getting bogged down in either processes or resource
allocation can be avoided. As part of the communication process, it is necessary to instill in everyone's mind that it is the final result desired
that drives everything else. If an intensive focus on goals and results can be developed, then the goals become the unifying force for the
company. Once goals are agreed on, conflicts over resource allocation, company priorities, and strategies tend to subside. And once the mindset
of key employees is clearly focused on goals and results, working to refine and segment goals both in terms of time lines and levels within the
organization becomes clearer.
Employees should be encouraged to continually ask "what if" questions. The following examples are illustrative: "If we want the company to
increase sales of Product A by 20 percent within three years, what should be our departmental or unit goals for the next year? For the next
quarter?" "If we anticipate that our sales may double within two years (based on an analysis of the industry), what resources will we need to
make that happen? How many employees will we need to hire? How many managers will we need? Do we have sufficient staff in the human
resources department to accomplish that? Do we need to adjust our salary schedules in order to attract that many people?" "If we want to
develop two new products per year in order to maintain the growth we envision, how much do we need to invest in research and development to
ensure the accomplishment of the goal? Should we add more scientists or engineers in the R&D department, or can we gain more product
development by restructuring into project teams?"
As seen from the above, the process of goal setting is often more important than the goals themselves because it encourages everyone to
work together. We feel strongly that this unifying force is well worth the time it takes.
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1. How do a company's goals differ from its mission?
2. Historically, what is the relationship between goals and actual performance? Is the relationship different for an emerging firm compared with
a slow-growing firm?
3. What process should be used to determine specific goals for an emerging business? Is this process different for a larger firm? For a not-for-
profit organization?
4. What is the similarity between action tasks, as they relate to specific goals, and strategies, as they relate to broader goals?
5. How can specific functional areas have horizon-level goals?
Notes
1. Many of the ideas for this target action plan are drawn from the goal-planning work of Robert S. Bailey of the Center for Creative
Leadership, Greensboro, North Carolina.
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Chapter 10
Developing Unit Strategies
Having shown how emerging businesses can analyze their environments and their capabilities to develop companywide strategies and how to
translate those strategies into goals for the company and its units, we turn now to developing strategies within those individual units. Think of a
series of linking pins, where the goals and strategies of each unit must be consistent with the strategies of the next higher unit. Emerging
companies may have three or four unit levels, and large companies may have many more, but in every case strategies at the unit level are linked
both upward and downward throughout the organization. After studying this chapter, you should be able to
• understand the relationship between the goal-setting process and the development of unit strategies;
• recognize the major parts of each of the unit strategies;
• explain the importance of each part of the unit strategies;
• realize the need for consistency among the parts of the plan; and
• understand the importance of specificity in the plan.
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Once the firm's goals have been set, unit strategies can be developed. A unit strategy is a plan of action indicating how managers within a given
unit area go about achieving near-term goals. Figure 10.1 incorporates the role of unit strategies into the goal-planning model. Recall that
company goals must first be prescribed for the relevant planning horizon and the near term. Then managers in each unit area can develop
relevant horizon and near-term goals for their areas. With these unit-level goals firmly in mind, managers then consider unit strategies that are
appropriate for each area and are consistent with both unit-level goals and overall company goals. For example, managers in the marketing
department will look at the overall business goals, determine marketing's role in achieving those goals, and then set unit goals for the marketing
area. They will then develop a set of marketing strategies to achieve those goals, ensuring that the marketing strategy meshes with the firm's
overall strategy.
Once unit strategies are in place, managers in each area can refine their relevant goals. Each group within an area creates its particular target
goals and target action plans. It should be clear that unit strategies cannot be viewed independently of, or in isolation from, goal development.
Figure 10.1
Relationship between Goals and Strategies
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Issues that must be addressed as a prerequisite to writing the actual business plan fall into four general categories: marketing, operations, human
resources, and financing. This chapter focuses on the strategic nature of the issues, and Chapter 11 discusses the actual writing of the plan.
Marketing Strategy
A company's marketing strategy must be detailed enough to help the owner or manager establish, for example, how many salespersons to hire, the
type and amount of advertising to use, the appropriate product mix, and pricing and selling strategies that make the most sense. The strategic plan
may not answer specific questions, but it should set forth general guidelines. And it should be sufficiently detailed to easily distinguish the business
from its competitors. Further, it should help employees identify and understand their relative roles in accomplishing the firm's objectives.
The Target Market Segment
Perhaps the most important marketing issue for new and emerging businesses is the determination of the market segment to be served. A
significant cause of failures among emerging businesses is that they attempt to be everything to everyone. Marketing dollars are spread too thin
and are therefore often wasted. If a company is trying to reach all the customers it possibly can, few will be properly served.
Defining a market segment does not mean that customers outside that segment are unwelcome. It only means they will not receive strategic
attention; that is, they will not receive primary emphasis. If customers outside the defined segment purchase the firm's goods or services, that's
fine. If enough customers outside the target market purchase from the company, the target market may need to be redefined. But the point is
this: There will never be enough marketing dollars, so by targeting more specific segments, managers can do a better job of marketing and can
serve customers better.
Consider the following example. Although many people buy waterbeds, most customers are either teenagers or adults under 30. Targeting
this market limits radio advertising to rock stations and limits TV advertising to certain shows. Newspaper ads can be placed on pages
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most read by those who are 15 to 30 years old. Marketing dollars can also be concentrated into time/media combinations that hit the target
audience most directly. Waterbed styles that are ordered most frequently by the target market are stocked and other styles special ordered,
which limits inventory while still giving most of the customers immediate service.
Product Mix
The overall strategy of the company largely determines the product mix, important for all small companies but especially so for new and
emerging businesses. Because these businesses are often strapped for cash, owners must decide the breadth and depth of the product line
carried. Even large companies wrestle with this issue. Apple Computer, for example, announced in 1998 that it was dropping its hand-held
computer; the success of the product was questionable, and the resources to support it were needed elsewhere. Smaller growth-oriented firms
may need to determine if a full product line is critical to their growth and success or whether manufacturing a more narrow line will yield a
higher return on investment.
Retailers may struggle with how many different brands to carry because it affects how many vendors they have to deal with, how much shelf
space each product gets, and how cooperative advertising dollars are used. Product mix decisions even include such things as after-sale
service, delivery policies, and store layout.
Pricing
A firm's pricing strategy is important for two reasons. The first relates to image. Part of the overall image of the firm and its product line or service
comes from the price of the product or service, so obviously a relationship between price and quality exists. But the actual relationship is
sometimes not as important as the perceived relationship. Most people perceive higher-priced goods to be better whether they are or not. Aspirin is
a good example. FDA regulations require all aspirin to have the same active ingredients. Any brand differences are in either the coatings or the
bonding agents. Yet millions, encouraged by advertising, are convinced that the national brands are worth the substantial difference in price.
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In many cases, the higher-priced product is the better-quality product. Pennsylvania House stands out as a premier-quality brand of
furniture. Cadillac, Mercedes, and Volvo carry distinctive automobile images and distinctive prices. Ben & Jerry's ice cream and Hummel
figurines are other examples where price and quality are both high and well accepted.
The second reason pricing strategy is important relates to margins. One business may sell at low prices in hopes that high volume will offset
low margins. Others, such as high-quality furniture stores, will depend on high margins to offset obviously lower volume. The pricing
strategy depends on the elasticity of the product's demand. That is, if prices are raised by 10 percent, will total revenue increase or decrease?
What will be the effect if competitors raise their prices 10 percent?
Some emerging businesses have carefully used price as a key competitive point to attract customers. Consider the case of Gateway
Computers, which builds quality PCs that have become the computer of choice for many businesses and individuals. Customers order directly
from Gateway, and each computer is built to the customer's specifications. Gateway delivers directly to the customer, generally within a week.
By eliminating the traditional retailer, Gateway has been able to offer a well-respected machine at an attractive price.
Neither high nor low pricing is necessarily advocated, but some specific strategy should be adopted. Managers should carefully determine
which type of pricing strategy works best for their firm; and sometimes a combination strategy may be used. In retail, a high-end pricing
strategy may be used with most of the product line, while loss leaders are used to attract customers to the store. Manufacturing companies, such
as Trek, Specialized, or Cannondale, offer some bicycle models that are high quality and high priced because they know that buyers are quality
conscious and not overly concerned with price. Bikes of lower price and quality are purposely made for first-time, usually price conscious,
buyers. Although the margins for lower-priced bikes may not be as high as margins for the better bikes, customers who purchase lower-priced
models may later move up to the higher-priced ones.
Promotion
Promotion refers to the approaches a business takes to communicate the value of its products and services to its target market. Promotion can
be done through advertising, personal selling, sales promotions, point-
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of-purchase displays, packaging, and even direct marketing through the Internet. The key for emerging businesses is to determine which
promotional method best communicates with its target market. For example, a firm that manufactures products that are sold to other businesses
will often use one-on-one personal selling and trade shows. This makes sense because building relationships and rapport are key. Once
relationships are established, however, repeat orders may be done by mail or fax. Retail firms may use print, radio, or television advertising.
Increasingly, firms are finding the Internet to be an excellent method for reaching customers. Virtually all publicly held companies and many
emerging companies put their annual reports and product information on the Web.
Managers must determine how much money to budget for promotional activities. Despite trade-offs, the value of promotion as a marketing
strategy must be clearly understood. The best products or services in the world can fail if potential customers are unaware that the business
offers them. Budgets must also consider the different types of promotion available and the cost-effectiveness of each given the nature of the
product and the target market.
Two caveats should be noted regarding promotional budgets. First, companies should avoid doing a little of everything; the growing business is
better off concentrating its promotional efforts to reach its specific target market rather than taking a "shotgun approach" aimed at hitting every
possible consumer. Second, companies should avoid placing a too-stringent financial limit on their promotional budgets. While promotion may
seem to contribute little to the immediate bottom line, it is critical for the growing business.
Selling Strategy
The selling strategy a company adopts ties in closely with the image of the company because it's affected by whether a high-quality or a low-
quality image is to be projected. You need only count the number of salespeople to differentiate between the self-service store and the full-
service store.
Store layout is also a part of selling strategy. A store whose aisles are cluttered with merchandise that is buried or out of reach projects a
different image than one with wide aisles and easily accessible merchandise.
Selling strategy depends on the target market. Sophisticated and prosperous customers may prefer personal attention when buying
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clothes, depend on in-home decorators when purchasing home furnishings, and want an expert to recommend art objects for their living room.
Those not interested in these expensive frills may want to browse, try on clothes without being hassled by a salesclerk, or pick out their own
home furnishings from the selection on the sales floor.
Selling strategy is at least as important to a manufacturing firm as it is to retail stores and is especially critical for launching a new firm. Should
the manufacturer attempt to market the product directly, using a company sales force? Should manufacturer's representatives be used? Should
the firm only manufacture the product, relying totally on a marketing company for distribution? Or should the owner of a manufacturing firm
license the product to someone else to manufacture? Because the product can reach the final customer in a variety of ways, emerging businesses
have to decide where to best allocate their resources to keep up with demand while controlling costs.
Two of the most important factors affecting selling strategy for small firms are the up-front investment and the day-to-day costs. A new firm
that manufactures a single product may be forced to use a manufacturer's representative because of the high unit cost associated with an in-
house sales force. The initial cost of hiring salespeople is prohibitive if a wide geographical area is being targeted. In new retail situations, day-
to-day costs may be the overriding factor. Stories abound of retail stores that, in the interests of quality and personal service, staff their stores
with too many clerks and find later that their wage and salary costs are excessive. Profile 10.1 is an example.
Many other short-run tactical or operational issues arise in selling, such as commissioned versus salaried salespeople, appropriate attitudes
among the salesforce, and part-time versus full-time workers. All of these issuesand others as wellare part of the overall marketing strategy
that owners must address in their strategic planning process.
Distribution
Distribution is of primary concern to manufacturing firms; the decision regarding distribution methods is how to get the product into the hands of
the final user. In some companies, the product is sold directly from the manufacturer to the customer. Examples include large industrial
equipment and the increasing use by consumer product manufacturers such as Gateway or Dell computers. In more cases, however, it
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Profile 10.1
Antiques Unlimited
Bill and Sandy Houlihan opened their dream business, an antiques mall called Antiques
Unlimited. They sensed antiques dealers wanted a year-round showroom where they could
exhibit their wares without hiring salespeople. Bill and Sandy rented space to dealers in a large
building they owned and provided all salesfloor personnel, who floated from area to area
monitoring and assisting customers. Bill and Sandy agreed to provide one salesclerk for every
five booths or every 1,200 square feet.
Their agreement was beneficial for the dealers but a "killer" for the Houlihans. Although
sometimes all salespeople were busy, far more times the only people in the mall were the clerks.
There was a limit to how much dusting, arranging, and bookkeeping they could do.
Attempting to renegotiate the agreement with dealers, the Houlihans encountered resistance
from the dealers of small but expensive antiques, who were concerned about shoplifting.
Furniture dealers, on the other hand, were not overly concerned. The problem was partially
resolved when the Houlihans agreed that the store would be fully staffed on weekends and other
days or times when traffic was expected to be heavy. At other times, one clerk would have to
suffice for every seven booths or 2,000 square feet. Further, they agreed to install lockable glass
cases for small antiques, which allowed customers to look at their leisure without risk to the
dealers of shoplifting.
makes sense to use one or more intermediaries such as wholesalers and retailers, whereby the manufacturer sells the product to a few
wholesalers who, in turn, sell the product to many, many retailers. Using intermediaries on the whole is much more efficient than trying to
distribute the products directly.
Service firmsplumbers, accountants, and printers, for examplealso have to be concerned with distribution. Here, the issues are the
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number of locations, the size of the operation, and the number of staff available in each location.
Operations Strategy
Operations issues affect all kinds of firms; inventory, for example, is a strategic issue in both manufacturing and retail businesses as are
purchasing and scheduling; and layout too is a concern for both retail stores and manufacturing firms. Operations strategy covers decisions related
to the manufacture of goods or provision of services and to the facilities issues associated with them.
Facilities
Strategic decisions about facilities are necessarily integrated with marketing and financial strategies. Major investments in facilities, for
example, may be required to meet increasing demand, but investing thousands of dollars in plant and equipment may take resources away
from marketing that will be needed to sell the very products produced in the expanded facilities. Or consider this. Managers of a growing firm
find they have an insufficient number of trainers to instruct dealers how to best sell and service their product, so they decide to hire two more
trainers and add $20,000 of audiovisual equipment for training. However, if they spend the $20,000 to buy the equipment, they won't have
enough funds left to hire both of the new trainers. They can have either the new equipment, or they can have two new trainers, but they can't
have both. This dilemma is known as opportunity costcommitting to one action precludes committing to another. It's a problem that affects
many resource-driven strategic decisions, but it is also often prevalent in issues related to facilities and operations.
Because facilities use extraordinary amounts of capital, the growth-oriented business owner must carefully project how large the firm's operations
are expected to be or are expected to grow in the foreseeable future. One of the most important decisions to be made is the acquisition of the
appropriate amount and type of space for the firm's operations. Thus, forecasting sales is critical to facilities decisions.
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Two strategic errors are common in decisions about space, either of which can adversely impact an emerging firm's ability to compete in the
long run. The first is overcapacity. The owner assumes the firm will grow quickly and leases or buys more capacity than the firm can use or
afford. Later, the firm is in trouble because of the financial drain caused by the overcapacity. The second error is acquiring insufficient space,
which leads to undercapacity. Operations quickly become so cramped that they are severely inefficient; with no room for expansion, the firm
must relocate. Retail stores often lose customers when they relocate, and for manufacturers the expense of relocating equipment and retrofitting
a new facility may create financial difficulties.
Another space-related issue is the type of space needed. Unfortunately, in many cases the small business starts out by using the most easily
available space rather than the most appropriate space. An entrepreneur starts a home-based business and stays there even though better space is
sorely needed; a budding retailer decides to open a shop near her home when space is available across town in a well-traveled shopping center; a
manufacturer accepts space in an old warehouse and then finds that the costs of remodeling and rewiring are excessive.
The key to space acquisition is finding a location that has enough space yet not too much. There are no hard-and-fast rules. A rough guide for
slower-growing firms is to acquire space that is 15 to 20 percent too large or that may be fully utilized within a year to 18 months. Emerging or
fast-growing firms should assume that growth will continue into the near future and acquire space that is considerably larger than currently
needed, thus ensuring available space and offsetting the near-term undercapacity problem. Although this strategy does present an immediate
overcapacity problem, it is not as serious a problem as being under capacity a short while after moving into the facility. The extra space is a
necessary hedge at a relatively small cost.
Make-or-Buy Decisions
The make-or-buy decision is another important strategic operations decision. It involves a great deal of money and is irreversibleat least in the
short run. For a manufacturing firm, the choices are to
• manufacture all products in-house;
• manufacture one or more prime products in-house and purchase other products finished, perhaps in packaging bearing the company name;
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• assemble some or all products from finished components and package them; or
• produce nothing, contract all production, do only packaging or perhaps not even that, and be responsible only for marketing the finished product.
Several factors influence the decision, and the firm's financial condition is certainly one. A business that is not able to invest large sums of money
in manufacturing facilities may be forced to contract most of its production. Insufficient space may also force a firm to contract some of its
production. On the other hand, a desire for quality may lead a firm to keep all of its production in-house. Lower production costs may also be a
reason to produce components in-house if the firm can make them for less than they could be purchased outside. In some cases, higher quality or
lower costs may not be as important as the availability of goods. If components must be purchased from suppliers that are unreliable in meeting
delivery dates, the company may be forced into producing its own components.
Some firms are taking the make-or-buy decision to new levels. They are creating what are called virtual organizations, in which the firm
either makes nothing or only a core set of products or engages in only certain processes with all the rest outsourced. Outsourcing minimizes
the investment the firm makes and limits its activities to only those things it does best. The virtual organization is very smallonly a skeleton of
what most companies are. The outsourcing allows it to appear to produce without the high fixed cost of plant and equipment.
Vendor Selection
An issue being increasingly considered by both large and emerging small businesses is vendor selection. Many large companies have switched
from using several vendors who each provide perhaps 20 percent of the firm's component needs to using a single vendor who satisfies the firm's
entire demand for the product. In the former system, the firm uses multiple vendors as a hedge against one or more of them becoming
unreliable. In the latter case, usually used in conjunction with a just-in-time inventory system, the firm contracts with a single vendor who
agrees to provide the inventory precisely when needed and at a competitive price. The contracting firm works hand-in-hand with the vendor to
ensure that problems don't arise. Smaller companies can't use just-in-
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time inventory to the same extent as large firms because they don't have the clout to ensure that a supplier meets all their demands. However,
the basic concepts of this method are still viable. Reducing the number of suppliers makes the business more vulnerable to the remaining
supplier, but it can also result in increased quality if only the best supplier is used and can sometimes also result in price breaks. In addition, the
ease of working with a single supplier may offset other risks.
Finished Inventory Strategy
As well as dealing with strategies covering suppliers and raw materials, owners must also adopt a strategy for inventorying finished goods. The
cost of maintaining substantial inventory must be weighed against two other factors, the first being the problem of stockouts. If the amount of
inventory is kept too close to demand, any sudden changes can result in stockouts that cause a company to lose both sales and customer
goodwill. In addition, maintaining minimal inventory causes both production runs and personnel needs to fluctuate, particularly true for
manufacturers who produce seasonal goods. Producing inventory in the off-season allows the owner to have a more level production schedule
and to avoid adding and laying off workers.
Complicating finished goods inventory even more is the cost of the inventory and its storage and the effect of that cost on the company's
financial condition. Thus, managers of emerging companies must consider the trade-offs between having an inventory strategy that causes too
much inventory to be held versus one that causes too little to be kept. Either error can be serious. Emerging firms, however, must carefully
guard against running out of inventory because they are in a growth cycle, a situation in which stockouts can be disastrouscompetitors can move
in quickly and capture market share.
Human Resources Strategy
Many human resources-related issues fall more within operational policies than within the larger strategic plan. However, our focus is on
major organizational issues that affect the overall business and its owners.
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Employee Selection
Perhaps no strategic issue is more important for emerging businesses than the selection of competent managers and employees. Managers are
responsible for both the strategic direction of the firm and its day-to-day operations, and they are critical in facilitating the company's growth.
Thus, extreme care must be taken when hiring additional managers. Competent employees are the foundation for the business's growth; and
even if there are no-hard-and-fast rules for choosing employees, some suggestions may help:
• Hire on the basis of ability, not friendship. Most people like to work with others when the relationship is comfortable and friendly, but skills
and talent are far more important. It may be fun to work with friends, but they may not have the background and ability to contribute what's
needed. In addition, it's very difficult to fire friends if they don't perform adequately. This is a significant problem in family businesses as
family members may expect to be hired and promoted regardless of their contribution to the business.
• Hire to offset existing weaknesses. Frequently, the tendency is for company managers to hire those who think like them. The greater
need, however, may be to hire those whose strengths offset current managerial weaknesses.
• Develop the position and then fit a person to it. Don't hire a person and then find a job to match the individual.
• Think strategy! Many people can handle day-to-day administrative duties, but finding someone with entrepreneurial capabilities who can
think toward the future is considerably more difficult.
• Once an employee is chosen, the key words are train and delegate. Give the new person sufficient guidance to develop important skills
and understanding of the business, and then delegate authority and responsibility. This allows the manager of the emerging business to
concentrate on the overall business growth strategy rather than spending too much time with routine decision making and provides all
employees with a feeling of competence and importance.
Wage and Salary Strategies
Wage and salary strategies are different from wage and salary policies. Policies deal with the technical aspects of implementing wage and
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salary strategies. The strategic emphasis of wage and salary issues is on items that significantly affect the overall operation of the business.
One important strategic issue is whether the firm will have a high-salary or a low-salary strategy coupled with benefit packages. These are
strategic issues because they can affect the firm's ability to attract and retain key qualified workers. Managers of emerging firms, struggling to
save scarce cash, may decide to use a low-salary approach or even consider deferred pay. Such strategies may not be successful, especially in
periods of low unemployment and high industry growth, because competitors may hire the best managers, leaving the company with only the
less qualified ones, who were not selected by higher-paying competitors. On the other hand, of course, a company that uses the high-salary
strategy may attract good workers but be unable to pay them while keeping prices competitive.
Similar strategic decisions must be made with lower-level employees. Hiring already-trained employees may require paying them more; it may
be more costly, but the new workers can quickly become productive. Hiring untrained but lower-paid employees may save on the human
resource budget but increase costs in the training budget.
The benefits issue is particularly important from a strategic standpoint as benefits don't add directly to the firm's productivity. The basic value
the business gains from providing additional employee benefits may come from having a more dedicated, more loyal workforce, as
demonstrated perhaps by an employee stock option plan, whereby the owner is willing to share increasing amounts of ownership in exchange
for presumed increases in employee commitment and dedication to the business.
Even fast-paced, technology-oriented businesses recognize that continued success only occurs when the right people are in place. Organic Online,
for example, highlighted in Profile 10.2, realizes that having talented people and treating them right is key to its development as an emerging
business. As CEO Jon Nelson suggests, the need for delegating and empowering is necessary to meet the growing work demands that an
emerging business faces.
Financial Strategy
Most analysts of business failures suggest they occur for two main reasons. One is a general lack of managerial planning. The second is the
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Profile 10.2
Organic Online: The Company Is the People

Organic Online is a hot Internet business that creates leading-edge Web sites for big companies like
McDonald's, Harley-Davidson, and Nike. Organic's success has been phenomenal: Started out of
Nelson's home in 1993, the company now has 125 employees. Having developed creative Web sites
for over 50 companies, Organic has prospered in the turbulent and competitive field of Internet
business.
As the company grew, CEO Jon Nelson realized he couldn't do everything on his own. He had to
delegate, and that meant having good people. ''It's all about finding great managers and staff. I guess
I'm a big wheel here, but Organic Online is not the Jon Nelson show. The company is the people. At
the end of the day, we're a people company," notes Nelson. Nelson observed that in the early days of
the business it was hard "delegating, empowering, and trusting. But I now know that I can't do it all. I
don't even try. I just say to people, 'You be responsible."'
Nelson works hard to build pride and motivation in his people. He offers an attractive health benefits
package with coverage for employees and domestic partners. He makes personal computers available
to his employees and even has bagels for them in the morning. Nelson admits that delegating is not
easy for the top person of an emerging business. Yet he understands its importance. "[Delegating is]
probably the biggest thing," he observes.
Source: James Kim, "Xers Mark the Spot for Success," USA Today, November 11, 1996, p. 3B; and
www.organic.com/overview/brief/, accessed May 30, 1998.
failure to finance the business adequately. Of course, inadequate financing may be a result of poor planning! Many small businessesand a number
of emerging businessesare undercapitalized. Often, they don't have adequate resources to weather economic downturns, and many can't take
advantage of growth opportunities. Managers of emerging busi-
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nesses must regularly monitor their financial position and their financial strategies.
Financial strategies used by new and emerging businesses fall into two general categories: equity strategies and debt strategies. Most businesses
will use a combination of financial sources as their overall financial strategy. In many cases new businesses and often emerging businesses will
rely heavily on the personal funds of the business's owners. Other combinations may include finding individual investors, venture capital,
partnerships, and a variety of debt.
The amount and source of funding is an integral part of the firm's strategy because it will affect the growth potential and control of the business.
For example, an owner who uses a high-debt strategy will maintain full control of the operation but will have a high debt-service expense. The
high level of debt may make the company vulnerable, especially when the economy moves into a recession or the industry falls on hard times.
Conversely, a company that has a high-equity strategy will have relatively less debt to service but must share some amount of profit and control
with investors. Moreover, companies whose managers are very conservative may use too little of either debt or equity and thereby limit growth.
Debt Strategies
Small start-up businesses may have relatively few alternatives to a debt strategy, especially true if the start-up is a retail or service business. The
options may be personal loans by the owner, loans from friends or relatives, or loans from a commercial bank. In the latter case, a percentage of
equity capital is a prerequisite. For example, a firm needing $50,000 may be able to get only $35,000 from a bank; the remaining $15,000 will
have to be owner's equity. Banks tend to be wary of small start-ups because so many fail. Related to bank financing is the Small Business
Administration's (SBA) guaranteed loan program, under which a bank agrees to the financing but the SBA guarantees 80 percent of the loan
amount for loans of $100,000 or less and guarantees 75 percent for all other loans. 1 Thus, a bank is risking only 25 to 30 percent of its funds, even
though it's loaning the entire amount. This encourages a bank to work with small businesses to which they might not otherwise offer a straight
commercial loan. Of course, the SBA guarantee does not in any way remove the burden of repayment from the business or its owners.
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Emerging companies have a somewhat easier time tapping into debt money than start-up companies because they are already established and in
a growth mode. Lenders may be willing to loan them money because they realize that emerging companies need the money to underwrite rapid
growth, and lenders feel their money is safe as the industry is growing. There is a downside for emerging companies, however: Growth quickly
outstrips available debt capital. Even though banks may be willing to loan emerging companies part of what they need, banks may be unwilling
to loan the entire amount needed.
Equity Strategies
A variety of financing strategies fall within the area of equity financing. As before, the type of strategy chosen may be a function of what
is available, although it may also be a function of the owner's overall strategic plan.
Partnerships are an obvious source of equity funding, but partnering is a strategy that the primary owner must consider carefully. This method
of financing has merit in that a working partner not only provides capital but also provides additional management skills. On the other hand,
taking in a partner changes the nature of the business. The primary owner is no longer the sole decision maker. Further, taking in a partner
requires that the profits or losses also be shared. In some cases, a limited partner or silent partner can be found. Then decision making normally
rests with the primary partner, although profits or losses must still be split with the other partners. Managers of emerging businesses must
consider whether a partner will help the company grow. If there are doubts about the role a partner might play as the company continues to
grow, then careful thought should precede a decision to add a partner.
A second strategy for raising equity capital is to sell stock either to individuals or to the general public through an initial public offering, or IPO.
Emerging companies often sell stock to wealthy acquaintances or to individual investors, often referred to as angels, who invest in a number of
high-potential businesses. Business angels can sometimes be found through a venture-funding database run by some universities or through
contacts with attorneys, accountants, and stock brokers, who may be aware of individuals looking for investments. Selling stock in this manner
will normally require that a business plan be prepared for investors.
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Much of that information, however, can be taken from the written strategic plan. Emerging businesses that have already had some success may
consider going public through an IPO, as is the case with Wilderness Sports, highlighted in Profile 10.3. An IPO is a complex process requiring
assistance from investment bankers and underwriters and sometimes taking a year or more to accomplish. However, if it is successful, the IPO
can bring in a substantial amount of funds.
Venture capitalists are an attractive avenue of financing for some emerging businesses. There are many varieties, each with its own
preferred investments; some, for example, invest only in high-tech compa-
Profile 10.3
Wilderness Sports: Growing through an IPO

Wilderness Sports was started in June 1992. Its retail store, in the Sacramento Sports Center, is
located between Lake Tahoe and the San Francisco Bay area. Wilderness offers upper-end clothing
and equipment for outdoor recreational activities; it sells and rents outdoor recreational equipment
for activities ranging from backpacking and backcountry skiing to canoeing and kayaking.
The company is now online and hopes to be fully interactive soon. With the business growing and
customer interest in outdoor adventures flourishing, Wilderness has big plans for future growth. Of
course, growth and big plans take money, so Wilderness has decided to go public and offer stock
for sale to the public. It is among the growing number of emerging businesses delving into an initial
public offering, or IPO. Wilderness is offering 200,000 shares of common stock for sale at $5 per
share for an aggregate offering of $1 million. If successful, the cash infusion will help Wilderness
tap its special niche in the recreational market.
Source: www.wildernesssports.com.background.html, accessed May 30, 1998; and www.ipo.com/

wildnerness.asp, accessed May 30, 1998.
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nies. Some venture capital firms are associated with industrial firms and only invest in companies that complement the parent firm's operations;
and some venture capital firms insist on majority ownership, although most take a minority, but significant, ownership position. All venture
capitalists require an extensive business plan, and they typically underwrite only about 1 percent of the companies whose plans they review.
Other Funding Strategies
Some funding sources don't fall neatly into either the debt or equity category, but they must still be considered part of financial strategy.
Leasing equipment rather than purchasing it is attractive in some cases, especially when equipment has a relatively short life or may become
obsolete within a few years. Although leasing may ultimately be more expensive than owning, it doesn't tie up corporate funds and eliminates
the need to incur debt.
Suppliers often provide short-term inventory financing, which technically is debt financing as there is an obligation to pay. However, the
payment may be made a few weeks later or, more rarely, at the end of the season.
Customers can also be a source of financing, often involving complex equipment that is specially ordered. The manufacturer requires partial
payment on order, with the remainder due on delivery. The manufacturer has thereby shifted part of the financial burden away from the firm to
the customer, thus reducing debt.
The Need for a Plan

Although there are several sources and possible strategies for financing, remember the underlying importance of developing a financial strategy,
in part for building a business plan that can be taken to lenders or equity sources. Financing should never be done ad hoc; owners should always
be aware of the various sources and uses of funds. The overall strategic plan must include financial strategy to allow the effective merging of
financial strategy, marketing strategy, human resources strategy, and operations strategy.
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Consultants are seldom called in to assess all functional or unit strategies. It is more likely, for example, that they will be asked to examine
the marketing strategy and make recommendations. Or perhaps they will be called in to help design a financial strategy. They may be asked to
study inventory strategies with the goal of making the company more efficient.
In working with unit strategies, consultants must keep the big picture in mind. Even if the assignment is marketing related, the marketing
strategy must mesh with the overall strategy of the firm and with the other unit strategies. Indeed, this is why many senior project consulting
teams are structured with team members from a variety of different business majors such as finance, accounting, marketing, and management.
Individual professional consultants working with a company must be careful not to let tunnel vision in a specific discipline cloud the big
picture for the firm.
Unit strategies must be written down no matter how tempting to simply discuss the strategies and be done with it. It is far better that each
unit manager is forced to write the strategy in some detail to reduce the chances that key aspects of the plan will be missed. It also affords
the opportunity for the written document to be shared with others in the organization that will be affected by it.
A final point is to again note the difference between a unit strategy and a policy. A consultant may, indeed, be called in to assess a policy but may
find that it is the unit strategy rather than a policy that is incorrect. For example, suppose a company is having difficulty with credit collections.
The business owner may ask a consultant to analyze the company's collection policies. The consultant may find that the collection policyhow the
company goes about collecting debtsis OK. What's wrong is the credit strategy, including deciding whether credit should be offered. Perhaps the
company sells a product for which it really makes sense for customers to pay in cash. If so, it shouldn't have a collection policy at all because it
shouldn't have any credit sales. Perhaps replacing in-house credit with bank credit cards makes more sense; the fees charged by credit card
companies may be more than offset by the bad debts on inhouse accounts.
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1. How will the marketing strategy of a discount firm differ from that of a top-of-the-line firm?
2. How does a firm's pricing strategy relate to its image?
3. Is it possible to have a manufacturing strategy that is relatively independent of the other parts of a firm's strategy?
4. How does human resources strategy relate to marketing strategy? To financial strategy?
5. Determine the overall strategy of a small manufacturing firm in your area. Then look at each unit strategy. Do they match?
Notes
1. SBA terms, www.firstsecuritybank.com/sbaterms.htm, accessed, August 14, 1998.
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Chapter 11
Writing the Plan
By this time, you should have a good feel for what goes into a strategic plan. You realize the need for both an external analysis of the firm's
environment and an objective analysis of the firm's strengths and weaknesses. You understand the nature of distinctive competencies, growth
strategy, goals, and unit strategies. But one more task remains: to put the analysis into a written document that can be read by the people with a
vested interest in how the firm competes. With this in mind, when you finish this chapter, you should
• have a good understanding of what an actual strategic plan looks like and
• be able to write a plan that fulfills the purposes discussed throughout the book.
This chapter reviews the items to be included in the strategic plan and discusses the actual format and writing. The strategic planning model
was divided into three phases: phase 1, providing the vision and
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mission of the business; phase 2, the analysis; and phase 3, the actions necessary to develop the strategy. The final step of the action phase is
the actual writing of the plan.
Why Write the Plan?
Small business owners frequently make the dangerous assumption that a plan can be stored in their mind and still give them needed direction
and guidance. Although the strategic plan is primarily an instrument for guiding the owner, others also read it; employees, for example, can
benefit from an awareness of where the business is headed. For emerging businesses and even some new ventures, investors too are keenly
interested in reading the plan; and at times, suppliers or even potential customers may want to read it. Even though some items in the written
plan may seem trite or self-evident to the owner, they may be necessary for others. New and emerging businesses may need to share their plan
or portions of their plan with investors, lenders, key suppliers, or perhaps even other businesses that might be partners in a strategic alliance.
Reasonably specific detail should be includedas much detail as confidentiality allows. Although details may seem unnecessary, remember that
a second key use of the plan is to review progress. The more specific the plan, the better progress can be evaluated. Less obvious is the
motivational effect of putting the plan on paper. The owner and employees are likely to be more committed to a plan if that plan has been put
on paper and shared with others. Consider Reder Electronics in Profile 11.1.
The Strategic Plan Format
Figure 11.1 shows the format for a strategic plan. This is followed by a detailed discussion of the format.
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Profile 11.1
Reder Electronics
Reder Electronics sets forth a strategic plan at the beginning of each fiscal year that
specifies relevant aspects of its environment, presents an assessment of its internal
strengths and weaknesses, and lays out the firm's goals clearly. A strategy for the year is
then presented that will be used to achieve the goals. The plan is not filed away, never to
be seen again; rather, it is a working document, referenced and reexamined regularly.
Scott Reder feels that such checks are critical and encourages quarterly reviews.
During these progress checks, Reder compares both the internal analysis and the external
assessment in the plan to the current situation. If necessary, a plan may be changed.
Remember, a plan is not etched in stone. The important thing, according to Reder, is that
the process he follows allows the business to "note where we have been and how far we
have to go to attain either the goals we set for ourselves or the new goals that have
developed since that writing."
Sometimes the quarterly analysis is favorable and encouraging. Sometimes it isn't. But
the reexamination procedure allows Reder to know where the company is compared with
where he wants it to be and then allows him to focus on corrective action.
The Vision and Mission Statements
The written vision and mission statements (see Chapter 3) need be no more than one or two paragraphs, although some may be a bit longer.
The vision statement should include what the owner wants the company to be at some time in the future. The mission statement must lay out
the general direction of the company and describe the firm's product line or groups of
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I. Vision statement
Mission statement
II.
A. Product line or services provided
B. Philosophy of the business
III. The business and its environment

A. General environment characteristics
B. Industry environment and competition
C. Location description
Distinctive competencies
IV.
V. Growth-strategies and goals

A. Company-level strategies
B. Company goals
1. Horizon goals
2. Near-term goals
Unit-level goals and strategies
VI.
A. Marketing
1. Target market
2. Product mix strategy
3. Pricing strategy
4. Promotion and selling strategy
5. Distribution strategy
B. Operation
1. Facilities
2. Make-or-buy decisions
3. Lease/purchase of equipment
4. Vendor selection
C. Human resources
1. Employment strategy
2. Promote from within
3. Wage/salary/benefits strategy
D. Financing
1. Debt/equity strategy
2. Capital sourcing strategy
3. Growth/stability strategy
4. Financial projections
VII. Target goals and target action plan
Figure 11.1
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product lines. It should also briefly discuss the owner's business philosophy. And it should be specific enough to let the reader assess how
the business operates and how its culture, tone, or climate appears to the public.
The Business and Its Environment
This section of the plan is a broad overview of the business designed to give potential readers a feel for the business and its operating environment.
It need not be excessively detailed but should provide the reader with a solid understanding of the firm and the key dynamics affecting its operation.
Initially, characteristics of the general environment should be discussed because general environmental factors affect all businesses. Even so,
note whether the company is a wholesale, manufacturing, retail, or service business.
Next, provide a fairly detailed discussion of the industry in which the firm competes. It should include the industry's sensitivity to the economy,
the intensity of competition, the nature of competition (price versus quality versus product differentiation), and the size of the total market.
Specific information on competitors should follow. Estimate each competitor's market share and other significant competitive factors. Include
any additional relevant information about key competitors. Taken together, the industry and competitors' data should provide a reasonably clear
idea of the size of the market and the degree of turbulence to expect in the industry that should give the reader an idea of where the business
fits within the industry.
Discuss the general location of the business, which may include overall community characteristics as well as comments on the business's
specific location. The key here is to include information that will be valuable for comparison later. Include such items as the unemployment rate
in the local community, the general outlook for the community, the relative location of competitors, and the strengths and weaknesses of the
company's location within the community.
Distinctive Competencies
Explain the company's distinctive competencies, with the degree of detail dependent on the intended audience. If the primary readers are inside
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the organization, a fairly specific rendering of distinctive competencies should be included to give employees management's perception of the
firm's key strengths, which may also be useful if lenders or other investors will be reading the plan. On the other hand, if suppliers, customers,
or others outside the firm have access to the plan, then a more conservative, less detailed presentation of the distinctive competencies should
be given so as not to tip off competitors about proprietary information.
Growth Strategies and Goals
This section lays out in more detail the direction in which the firm is headed. It also focuses on more specific goals, both for the business as a
whole and for the units within the business.
Growth Strategies
The strategies that the business will pursue in order to grow should be explained well, including their justification. Remember that a growth
strategy is an overall, general plan or approach for running the firm in response to its external and internal conditions (refer to Chapter 8).
The description of the individual strategies in the plan must be detailed enough to make their precise nature clear.
Company Goals
While the mission and vision statements let readers know where the business is headed and growth strategies prescribe a general business
approach for getting there, company goals enable the reader to see the specific achievements or results the owner expects the business to
reach. Company goals covering both the horizon and near term should be included. The two time frames should be presented so that readers
can clearly see the relationship between the near-term goals and the broader horizon goals.
As noted in Chapter 9, horizon goals are oriented toward the overall planning horizon, so these goals are stated in broad terms. Near-term
goals concentrate on the next business operating period and require greater precision, detail, and specificity. Horizon and near-term goals are
fundamental, critical elements in the written plan. Goal statements are one of the primary factors that outside readers focus on in assessing
the business, its scope of activities, and the plausibility of its intended direction. In addition, near-term goals become the key benchmarks for
monitoring and evaluating business operations. Their effects on internal direction and control, as well as on external perceptions of the
business, are quite significant.
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Unit Goals and Strategies
Once company goals have been written into the plan, enumerate the unit-level goals and strategies for both horizon and near-term time frames.
Unit goals are written in the same manner as company goals except that they focus on issues relevant to a functional area. Of course, unit goals
must mesh with and complement each other and relate and support the fulfillment of broader company goals.
Once unit-level goals are written, add statements of unit strategies relevant to the achievement of these goals. Four areas of unit strategies have
been stressed: marketing, operations, human resources, and finance. Although these are not necessarily an all-inclusive list of concerns, they
do represent the key unit areas for most emerging businesses.
Marketing
At least five items should be identified as part of marketing strategy. Address each separately in order to have a clear understanding of the firm's
total marketing strategy. In general, these strategy decisions will be led, or primarily determined by, the unit goals.
The target market should specifically identify the primary customers of the business. Note the demographic makeup of the target market,
including age ranges, socioeconomic status, customer location if relevant, and any other distinguishing characteristics (refer to Chapter 4). It may
be helpful to include target market A and target market B, where the A group includes those in the primary target market and the B group
includes those in an important but secondary category.
The product mix strategy consists of a description of the general products carried by the firm, including whether the products are considered top
of the line, moderately priced, or economy priced. It should indicate the breadth and depth of the product line and if special orders are accepted
or encouraged. It should also indicate whether the firm intends to increase its product mix over time, maintain the mix, or phase out portions of
the product line.
The pricing strategy should follow the product strategy. Very simply, it should state whether the pricing strategy is to price higher than,
competitive with, or lower than competitors. It may include more specific information, such as ''Our pricing strategy is to consistently price
15 percent below the competition and to honor competitors' prices in those cases in which their prices are lower than ours."
The promotion strategy is certainly one of the key aspects of the overall marketing strategy. Chapter 10 suggests the importance of determining
an overall promotion strategy, budgeting for it correctly, and staying with
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that strategy. It is very important that the selected strategy be defined as specifically as possible in order to serve as a control later on. Write
down the promotional strategy, because writing encourages consistency.
The promotional plan includes the total budgeted amount to be spent on advertising and other promotional activities; a month-by-month
breakdown of the annual promotional budget; a description of the media to be used; the frequency of advertising; whether (and which)
advertising agencies will be used; the nature of the advertising; and the image to be conveyed. Each of these items should be laid out in as
much detail as possible and then regularly reviewed. A haphazard promotion strategy can confuse customers and allow promotion resources to
be used inefficiently. At the very least, the written strategy should eliminate spur-of-the-moment acquiescence to some aggressive ad
salesperson who walks in the door.
The distribution strategy should have been determined as a result of earlier analysis. Write it down clearly so that readers inside and outside
the business can understand and evaluate it easily. Include the types of distribution channels used, the method of accessing those channels, the
reasons those particular channels are used, and the impact the distribution system should have on sales. Again, the reason for writing this on
paper is not only to have it available for others to see but also for the business owner to be able to review it at a later date. As a business
grows, the most effective and efficient method of distribution may change. At one stage in a manufacturing business, for example, a
manufacturer's representative may be the most efficient method of distribution. But as the business grows, an in-house salesperson plus an on-
the-road commissioned sales force may be more effective and more efficient. In some situations, the opposite case can be made: The company
sales force introduces the product, and a manufacturer's representative takes over once the product becomes established and well known in the
industry.
Operations
Strategies relating to operations tend to be more stable than those relating to marketing because they often deal with fixed assets rather than
annual expenses. Far more analysis is involved in determining an initial operations strategy, and equal care must be taken when changing it.
Typical of these decisions is the strategy covering facilities.
Operations strategies are much less frequently changed than are some of the others, but it's still wise to write them down on paper for employees
and other key people to read. Also, operations strategies serve as the basis for developing cohesive policies to guide day-to-day actions within
the core part of the business.
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For product-related firms, make-or-buy decisions are key parts of operations strategies and should be clearly delineated in the strategic
planning document. Included here are statements declaring whether the firm, for example, plans to be a full manufacturer, an assembler, a
distributor, or some combination of the above. These decisions will typically also answer the make-or-buy questions, but more specifications
should be included if the firm makes part of its components and purchases the rest outside. In the Joy's Toys Company example in Profile
11.2, the overall
Profile 11.2
Joy's Toys Company
Operations Strategy
Joy's Toys Company's production strategy is to do all assembly work on its stuffed animals
and produce the clothes for all the models. Parts for the animals will be purchased from
reputable suppliers only, thereby reducing the need for 100 percent inspection of purchased
materials. Cloth for the skin will be purchased ready to cut. Stuffing will be purchased in
the largest quantities that inventory space will allow to take advantage of volume
discounts. Hard pieces (eyes, noses, and buttons) will be standardized as much as possible
throughout all models to reduce both ordering and inventory costs.
Attempts will be made to retain workers as long as possible to reduce assembly defects.
Cutting machines are scheduled to be replaced on a rotating basis beginning the last quarter
of this year, with one machine replaced each of the next six quarters.
If market research indicates that sales of the newest models will continue to expand, new
facilities for storage of finished inventory will be necessary by 2001. Therefore,
preliminary plans for the building should be developed by the end of the second quarter of
2000.
Cost reductions will be necessary throughout the next several quarters, especially on the
older models. Discussions will be held with marketing personnel on how to encourage
distributors to submit larger orders so as to increase the size of production runs.
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operations strategy combines some longer-range strategies with some shorter-term ones. This is perfectly acceptable because the overall
strategy should be reviewed at least semiannually anyway. The strategy statement serves as a later check against whether the marketing
department did in fact cooperate successfully, whether the market research did in fact show increased sales projections, and whether the
building plan was in fact completed.
Make-or-buy decisions should be included in the overall operations strategy. Joy's Toys consciously decided to purchase most material from
reputable suppliers rather than manufacture the cloth, eyes, buttons, and the like. This doesn't mean the company should proceed in this
manner forever. In later strategy reviews, a decision might be made to manufacture the eyes and buttons in-house, which would be a
significant change in strategy, however, and a decision that would be made only after careful study.
Leasing rather than purchasing equipment is a decision in which individuals both inside and outside the business may have an interest. Those
inside the business may be interested because of the ramifications of the decision on service, equipment replacement schedules, warranties, and
so on. Those outside the business may be interested because of the financial ramifications. Investors and lenders may want to know the impact
of leasing on the cash flow of the company as well as on the balance sheet and income statements. In other words, purchasing equipment
outright may require significant debt, but the equipment appears as an asset on the balance sheet. If the equipment is leased, the initial
expenditure and debt are not as significant, but lease payments become a substantial expense.
Vendor strategies should be included too. The primary issue is whether to have a single source or multiple sources for particular supplies. Having
a single source suggests larger quantities, thereby opening up the possibility of quantity discounts. On the other hand, having multiple sources is
a lower-risk strategy, assuming all suppliers can meet quality standards.
Human Resources
Many policies fall within the human resource functiontesting, interviewing, evaluation, and termination. Some human resources strategies,
however, must be considered and included in the written strategic plan.
First is employment strategy. Of particular importance are sources of managers and line workers and the method of hiring them. For example, it
may be part of the strategy to hire only college graduates from accredited business schools. Some large firms hire liberal arts graduates, whom
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they then train in-house. Other firms hire only experienced workers, thus alleviating the need for all but orientation training once workers are hired.
The second aspect of human resources strategy is promotion. This may appear to be more of a policy than a strategy, but it fits the definition
of strategy because it can determine the future effectiveness of the company's people. The plan should indicate whether the firm typically
promotes from within or hires managers from outside. A case can be made either way, but the strategy should be communicated to interested
people, including employees.
A third strategy issue to be delineated is compensation, which, of course, must be kept relatively broad to avoid internal problems. But such items
as a bonus plan, insurance benefits, company cars, and stock options should be included. If the company has a history of paying higher-than-
competitive wages, this should be noted and periodically reviewed. Any other items in the wage and salary area that might make the company
more attractive than its competitors should also be included.
Financing
Much of the financial strategy is more detailed in a business plan used for getting financing than it is in the strategic plan. However, it is important
to include major factors of the financial strategy in the strategic plan both as a guide for future direction and as a control.
A major portion of financial strategy deals with debt versus equity. In new businesses, a default strategy may be followedwhatever strategy
is successful will be used. The most successful strategy may be the only strategy available.
An emerging business typically has more options. Some owners prefer to rely totally on internally generated funds, taking on little or no
additional equity or debt financing. This may limit growth, of course, but it's a viable strategy. Others may rely primarily on debt financing, and
still others on additional equity financing or on a combination of debt and equity financing. As we have said many times, the concern is not what
is included in the strategy but that the strategy be presented in written form to allow reading and review.
Capital sources to be tapped should be listed as these will change over time. Numerous sources are available, including banks, venture
capitalists, state and federal loan programs, and suppliers. If the firm is to use a combination of these sources, a rough estimation of the
relative proportion of each should be stated.
An additional item that should be included in discussing sources of capital is the rate of growth the emerging firm wants to achieve. Will the firm
use all available sources of financing to the maximum in order to
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achieve the highest possible growth, or will growth be a function of the amount of financing that can be obtained with minimum risk? The
growth question must be answered early on in the strategic planning process because it affects nearly all other areas of the business.
Growth preferences are also covered in the vision section and in the company strategy sections.
Financial projections are one of the most important parts of the strategic plan and the most important part of an investment-oriented business
plan. Lenders or venture capitalists want to see monthly or quarterly projections of income statements for one or two years along with quarterly
or annual projections for up to five years. In emerging businesses, a cash flow projection is perhaps even more important than the income
statement projection simply because the manager of an emerging business is often strapped for cash and constantly needs to be aware of relative
cash inflows and outflows. It is not uncommon for a small business to be in serious trouble, even though it is making a profit, because the
outflows of cash necessarily precede the inflows. This is especially true if the business deals in credit or does work for federal, state, or local
government, which is often slow in paying for goods or services. Similarly, the balance sheet should be completed for the year-end of each of
the next several years (refer to Chapter 6 for a review of various financial statements).
Target Goals and Target Action Plans

Although it is important to write down target goals and target action plans, they are so specific that they are typically presented in a
separate document. Readers outside the company will find the detail of these areas unnecessary for their purposes. For the owner and
employees, however, they offer daily guidance. (Details about target goals and target action plans are presented in Chapter 9.) Remember
that because target goals and action plans are short run, they need to be flexible and adaptable.
Sharing the Plan
Once the task of writing the strategic plan is complete, what should managers do with it? Of course, it must be communicated to key people in
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the firm (although many of them were no doubt involved in developing the plan). Debate arises over how widely to distribute the plan. Some
argue that sharing the plan provides employees with a keener sense of where the business is headed and thereby improves their dedication
and motivation. The same logic could apply to key suppliers or those with whom the business is building strategic links or alliances. If the
workforce is small and viewed as stable and loyal, it's a good idea to share at least part of the plan if not all of it with everyone. Similarly, if
alliances are strong and enduring, sharing the plan or key portions of it makes sense.
The other side of the debate deals with the real need for security and the protection of sensitive information. For example, there is some risk that
an employee may take the information from the plan and either join a competitor or start a competing business. By the same token, other
businesses may use information from the plan to their competitive advantage. In these cases, excerpts from the plan may be the preferred route.
Employees, for example, could be given the goal section of the plan, and more sensitive items shared only with top management. The complete
plan or portions of it may need to be shown to investors, suppliers, or key customers, but it's a good idea not to show sensitive information to
outside groups unless it's specifically required.
As consultants work with managers of emerging businesses, they should encourage managers to differentiate between a business plan used
when financing is needed and the strategic plan that is used to guide the company's performance. The strategic plan has a different flavor or tone
than does the business plan, which is written in an upbeat, optimistic style. The purpose of the business plan is to generate interest in providing
capital to the firm. The strategic plan, on the other hand, is written objectively and is for the benefit of people inside the firm; it shouldn't be
glossy or unduly optimistic. The object is not to impress others but to provide guidance and benchmarks for the future.
A second issue for consideration by consultants is the level of detail in the strategic plan. Consultants probably know what a manager's intent was
in writing the plan and thus who is likely to read it, which should provide a clue to the amount of detail needed. Generally, more detail is
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better. Some owners may resist a lot of detail, but the trend is to provide more information to those within the firm. This is especially true
in emerging businesses as most of the employees may be committing many, many hours to the company, and it increases their motivation
to understand where the company is headed and what its current status is.
Finally, consultants should encourage clients to communicate the plan to all interested people and to set a specific time for a review of the
company's progress. A review should be done at least three to six months after the plan is written but no later than a year after. At least one quarter
is necessary for changes in the firm's strategy or environment to be noticeable. Thus, progress should be ascertained at the end of the quarter after
the plan is written or at the end of the succeeding quarter. This is not to say that monthly performance should be ignored, but from a strategic
viewpoint, a somewhat longer time frame may be more useful. On the other hand, waiting longer than a year to review the company's progress
negates the usefulness of the plan. Any time longer than that may reveal so many changes in either the firm's internal status, its strategy, or the
economic and competitive environment it faces that no one could determine any cause and effect relationship.
A consultant and the business owner or manager should set a definitive date, approximately a year in advance, to review the plan. Then
the consultantor perhaps the supervising professor in the case of student teamsshould keep the date in a tickler file as a reminder to
reestablish contact.
It is crucial to write very specific items into the final strategic planning document, a document so detailed and clearly written that all
interested parties can understand where the firm is headed and how it plans to get there. In addition, the written document serves as a
control measure and an evaluative device at the end of the quarter, fiscal year, or other key time period.
A Final Comment
We've attempted throughout this book to provide as much information as possible to aid in the creation of a strategic plan for new and
emerging businesses. Owners of these businesses are reluctant to take the time necessary to analyze the environment, assess the strengths and
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weaknesses of the business, and develop a strategic plan based on the distinctive competencies the business possesses. The effort, however, should
be highly rewarding, not only because of the strategies actually developed, but because the owner has taken the time to analyze the firm and its
environment objectively. This objective analysis alone is worth the time and effort! A written plan provides additional benefits: It encourages
commitment to a specific plan, and it offers a mechanism for reviewing progress later. The plan becomes both a measure of success and a method
of achieving success. The development and writing of a strategic plan won't guarantee success, but it is a giant stride in that direction.
1. What items should appear in the Business and Its Environment section?
2. How often should the entire strategic plan be rewritten?
3. Are each of the items under the unit goals and strategies section necessary for all firms? Which should always be included and which are optional?
4. What can be done to ensure that the plan is reviewed periodically?
5. How should the plan be shared?
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Appendix
Sample Strategic Plan Gaston Ridge Home Health Care, Inc.
The following strategic plan for Gaston Ridge Home Health Care, Inc., provides a sample for readers. Gaston Ridge is a service business
operating in the growing and increasingly competitive field of home health care. Although Gaston Ridge's plan is thorough, not every section of
the plan is relevant for every business. Service businesses have different styles for plans than do manufacturing businesses. Managers or
consultants writing strategic plans should adapt the plan format to their particular needs.
Gaston Ridge Home Health Care, Inc. Strategic Plan
I. Vision Statement
Gaston Ridge Home Health Care, Inc.'s vision is to be the provider of choice for home health care in the geographic area we serve, while having
the respect of clients and their families.
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II. Mission Statement
Gaston Ridge Home Health Care, Inc., provides a full range of quality home health care services to patients in smaller and rural areas of an
eight-county licensed service area of southern Illinois.
A. Product Line or Services Provided
Although 15 services are provided, we focus primarily on services prescribed by physicians, such as injections, medications, applications of
bandages, etc. To a lesser extent, we educate and train patients and offer occupational and physical therapy. Other services will be added as
client demands and expectations arise.
B. Philosophy of the Business
Gaston Ridge operates in a team-oriented manner, with open communication and group consensus guiding major decisions. All employees are
encouraged to contribute ideas and suggestions. Gaston Ridge staff spends considerable time and energy building strong relationships with
patients and patient families. We are extraordinarily sensitive to the unique needs of patients and their loved ones. Employees are encouraged to
build rapport, confidence, and trust as they attend to their patients.
III. The Business and Its Environment
A. General Environment Characteristics
The senior citizen population is one of the largest groups of individuals in the United States, and this group will grow at an increasing rate as
baby boomers move into the retirement years. In particular, the elderly population is rapidly growing, and many in this group will require
health care. A significant proportion of them will prefer to receive health care in their home rather than traveling to clinics or residing in
nursing homes. Gaston Ridge provides home health care services to patients in small communities and rural sections of an eight-county area
of southern Illinois. Most of the current clients are homebound by advanced age or disability.
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Expanding technology will continue to affect home health care. Technology will allow us to schedule and control interactions with patients.
In addition, technology will increasingly allow procedures such as dialysis, cancer chemotherapy, drug infusion for heart failure, intravenous
blood transfusion, and other procedures to be done in patients' homes.
The economy has been expanding in recent years, but its continued expansion is always in doubt. Medicare and Medicaid regulations must
be monitored closely for changes that may affect Gaston Ridge. It appears that there will be a continued emphasis in home health care rather
than nursing homes and hospitals.
B. Industry Characteristics
Home health care is the fastest-growing segment of health care. Because of the anticipated interaction of political issues, social and
demographic changes, and technological advances, the home health care industry should incur significant growth over the next decade. Further,
the home health care industry will remain in the growth stage of the product life cycle for some time. Much of this sustained growth is due to the
fact that the costs of traditional health care will continue to increase, prompting alternative considerations such as home care.
Gaston Ridge has 16 competitors that operate in at least one of the counties within its service area. However, some of these agencies have only
a minor presence. Six major competitor agencies are key players in the area and pose the strongest competitive threat to Gaston Ridge. They are
Illini Home Health Care (an affiliate of Illini Medical Center), Capital Center Hospital, Mid-Central Home Health Association, Pioneer
Homecare, Cashing Home Health Care, and Senior Dimension Home Care. Both Illini and Capital possess strong services in physical and
occupational therapy relative to the competition. However, these services are costly, so their prices are above average. Mid-Central provides
meals but quality is perceived as low. No doubt because of their hospital affiliations, Illini and Capital possess strong physician and discharge
planner referral bases relative to other competitors. No competitor possesses strong consumer familiarity.
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C. Location Description
Gaston Ridge operates in an eight-county service area of southern Illinois. It is located in Perryville, a small community centrally located in the
eight-county region. Gaston Ridge is housed in a medical building. The site is used primarily for administrative purposes, although some
consultation with families of patients and prospective patients is conducted at this location. The site is acceptable and its central location is
critical, because employees need to travel to patients' homes.
IV. Distinctive Competencies
The most important distinctive competency is the culture and image of Gaston Ridge. The personal service and attention to building caring
relationships with patients and their families differentiates Gaston Ridge from its competitors. Gaston Ridge's considerate approach is
valued by consumers and is a key part of Gaston Ridge's approach to its target market. In comparison to Illini Home Health Care and Capital
Center, the two most formidable competitors, Gaston Ridge offers more moderate prices.
V. Strategy and Goals
A. Strategy
Gaston Ridge's strategy is to focus on the needs of homebound patients in rural areas. Services are provided in 15 categories that duplicate many
of those provided within a hospital setting. We do not compete in larger cities.
B. Company Goals
1. Horizon Goals
a. Increase the patient base by 100 percent over the next 3 years.
b. Increase awareness of Gaston Ridge and the services we offer over the next 3 years so that 90 percent of physicians and 75 percent of
the customers in the target market are familiar with us.
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2. Near-Term Goals
a. Develop and implement a new promotional campaign to introduce Gaston Ridge personnel and services to all physicians in the service area
within the next 12 months. This goal is segmented into target goals of reaching eight designated physicians every 6 weeks.
b. Add two physical therapy assistants to the staff within the next year.
c. Hire a physical therapist as soon as we are sure that the physical therapy client load will reach 35 visits a month.
d. Provide a meal delivery service in Perryville within the next 6 months.
VI. Unit-Level Strategies
A. Marketing
1. Target Market
Gaston Ridge serves an eight-county, 490-square-mile area of southern Illinois. More than 60 percent of Gaston Ridge's market resides in rural
areas, with most of the remainder living in small communities. The target market is primarily aged or disabled people who are homebound.
2. Product Line Strategy
Gaston Ridge Home Health Care, Inc., offers services in 15 areas: new diabetic teaching, venipuncture, intromuscular injections,
intravenous therapy, medication teaching, hypertension management, diet instruction, home catheter insertion and maintenance, feeding
tubes, postoperative care, wound care, hot/cold applications, physical therapy, occupational therapy, and speech therapy. Physical
therapy, occupational therapy, and speech therapy services are contracted through outside sources.
3. Pricing Strategy
Gaston Ridge's pricing structure is average relative to competitors in the service area.
4. Promotion Strategy
Minimal advertising is currently done to increase awareness and obtain new patients because of the rural nature of
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the target market and the lack of a single medium that covers the entire area cost effectively. The following actions comprise the promotion mix:
a. Monthly blood pressure and cholesterol screenings will be conducted in Perryville and the surrounding communities of Ellsworth,
Corrington, Wood Ridge, and Brookside. These activities will be arranged through senior citizen centers and local churches. The screenings will
be free of charge. Notices of the screenings will be public service advertisements in the local weekly newspapers and radio stations in the area.
b. Informational and goodwill advertising will be placed in the weekly newspapers on a monthly basis.
c. Frequent efforts will be made to inform and influence physicians and their nurses. Gaston Ridge will offer 45-minute breakfast or luncheon
meetings with physicians and their nurses at the physician's office. These will be scheduled on Tuesdays and Thursdays, our slow days. These
meetings will begin with a 15-minute formal presentation about our services followed by a question-and-answer period. At the conclusion,
coffee mugs with the Gaston Ridge logo will be given to the physician and his or her staff. Personalized thank-you notes will be sent the
following week. New brochures and follow-up thank-you notes for referrals will be sent every six months.
B. Operations and Human Resources
1. Rene Price, RN, is the administrator and president of Gaston Ridge. She is responsible for payroll, insurance, benefits, and scheduling.
Jane Heske, RN, is the director of nursing services. Her responsibilities include Medicare filing, operating the computer, and billing. Michelle
Lewis, RN, and Tami Skinner, RN, are case managers in charge of all patients. These four principals each draw a salary from the business.
2. Gaston Ridge employs one full-time health care aide and three part-time health care aides. These women are paid an hourly wage competitive
for the industry and area. Physical therapy, occupational therapy, and speech therapy are handled, as needed, on a contractual basis through
outside sources. These therapists are also paid an hourly wage.
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3. Currently, Gaston Ridge has standard technology and equipment consistent with most of its competitors. However, it does not possess, or does
it have ready access to, some of the newer equipment and machines such as mobile EKG and X-ray machines.
4. Clients are billed on an accounts receivable basis. The average accounts receivable collection period is three months after the date of billing.
C. Financial Strategy
Gaston Ridge has received strong community support in the Perryville area and has been able to obtain funds as needed. The county has provided
a low-interest loan of $17,000 at 5 percent interest. Further, Legion Bank, located in Perryville, has offered a $20,000 line of credit at 8 percent.
VII. Target Goals and Target Action Plan
1. Design a new physician-focused promotional campaign by July 31.
2. Secure promotional materials and arrangements by August 31.
3. Begin initial promotional contacts by September 15.
4. Determine new job responsibilities for physical therapy assistants and home health aides by August 15.
5. Recruit and hire a full-time additional home health aide and the first physical therapy assistant by September 30.
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Glossary
accounts receivableSales or revenues extended to customers on credit that have not yet been collected.
acid test ratioA liquidity ratio that measures a firm's ability to pay its short-term bills; measured by subtracting inventory from current assets
and dividing the result by current liabilities.
activity ratiosRatios that indicate the movement of items through the business and include the inventory turnover ratio and the accounts
receivable turnover.
assetsThings a company owns that include current assets such as cash, fixed assets such as equipment, and intangible assets such as patents.
average collection periodThe average amount of days required to collect accounts receivable; calculated as the accounts receivable turnover
divided into 365 days.
balance sheetThe financial statement that describes the condition of the business; consists of assets, liabilities, and equity.
business plansEither of two major types of plans for a business: The strategic plan focuses on the strategies for the business, and the financial
plan focuses on the acquisition and use of funds and is used primarily for acquiring external financing.
C
cash flowThe movement of cash into and out of the business, which, for small and new businesses, is often more important than net income.
company goalsOverall goals for a firm that may be either horizon goals or near-term goals.
competitive analysis profileA ranking of a company's competitors based on key industry success factors.
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competitive environmentThe part of a firm's environment that directly affects the firm and may be affected by the firm's strategy; it includes
the firm's customers, competitors, suppliers, and the community in which it operates.
competitive opportunityA situation in the firm's environment that can be exploited if appropriate firm capabilities exist.
competitive rivalryThe degree to which competitors jockey for position and market share; it is influenced by number and size of competitors and
the growth of the industry.
competitive weaknessA weakness in a firm that makes it especially vulnerable to moves of competitors; the opposite of a distinctive competency.
consultantA person or group that provides advice to a business; may be professionals, not-for-profit, part-time, or student groups.
consulting reportThe written or oral presentation to the client outlining the consultant's work and recommendations.
cost containmentActions taken to reduce or limit costs of operations.
creativity, environment forA situation in a business in which key players are willing to consider new ideas, take risks, and create innovations.
cultureThe tone or climate of a firm; the organizational or corporate culture in a new or emerging firm is strongly affected by the owner and, in
turn, affects how the company will address the market in which it competes.
current ratioThe measure of a firm's ability to pay its bills; calculated as current assets divided by current liabilities.
debt-to-assets ratioA leverage ratio indicating the degree to which assets are funded by debt; measured as total debt divided by total assets.
debt-to-equity ratioA leverage ratio indicating the percentage of total funding of the business provided by debt; measured by dividing total debt
by total equity.
demographic changesChanges in the makeup of society, particularly regarding the number in particular age brackets, education levels, or
income groups.
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distinctive competencyA particular strength a company has that significantly surpasses that of competitors.
diversification strategyA firm's strategy based on an intention to expand into completely different products and markets.
driving forcesMajor factors that influence the future direction of an industry, including demand drivers and competitive drivers.
emerging businessA business that is either growing or is poised for growth.
environmental analysisThe analysis of a firm's external environment, including economic, social, technological, political, industry, and
competitive factors.
environmental brainstormingA process for identifying environmental influences.
ETOP (Environmental Threats and Opportunities Profile)A process for identifying both opportunities and threats by comparing competitors
and other environmental situations on a ''strong threat" to "strong opportunity" continuum.
equityThe amount of ownership one has in a business; also, the residual when total liabilities are subtracted from total assets.
equity fundingExternal funding provided in the form of ownership as opposed to debt and may include shares of stock sold to the public or
a percentage of ownership held by partners.
external focusThe approach to strategic planning that encourages doing an environmental analysis before doing an internal analysis; the
internal analysis is based on identified opportunities and threats.
facilitiesFixed assets usually consisting of plant and equipment, regardless of whether they are owned or leased.
financial ratiosOne of the primary means of assessing the financial performance of a firm by comparing two or more items from the firm's
balance sheet, cash flow statement, or income statement.
firm analysis(See internal analysis.)
forces for changeAny of a number of external situations that may cause managers to consider the need for new strategies.
G
general environmentThe portion of a firm's environment beyond its capability to affect; includes economic, political, technological,
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and social factors within the environment. The general environment is differentiated from the industry or competitive environment. Also known
as the macroenvironment.
goalA stated objective for the firm usually expressed in terms of dollars of sales, return on investment, market share, or other financial measure;
may be either long-term (horizon) or near-term and may be for the company or one of its units. A goal is to be differentiated from a strategy,
which is an action taken to achieve a goal.
gross profit marginGross profit (revenues less cost of goods sold) divided by sales.
high (low) marginsA pricing strategy in which the unit price is high (or low) in comparison with the unit cost.
high (low) volumeTypically the result of a low-margin (or highmargin) pricing strategy; volume times margin equals gross profit.
income statementThe financial statement that presents details of a firm's revenues, expenses, and profit or loss; may be calculated on a
monthly, quarterly, or annual basis.
incremental changeChanges in products that are minor improvements over existing products.
industry environmentThe portion of a company's environment that includes competitors and the industry as a whole.
initial public offering (IPO)The first offering of a firm's stock to the general public. The process is expensive but may bring in substantial capital
for the firm and its owners.
internal analysisThe steps taken to analyze a firm's strengths and weaknesses that should include all aspects of the firm, including its
human resources, financial resources, marketing procedures, products, and operations. It is useful to do the analysis in comparison with
competitors if possible.
internal analysis profileA rating of the firm's strengths and weaknesses using a scale such as "strong weakness" to "strong strength."
inventory turnoverAn indicator of the speed with which inventory is moving through the firm; measured by dividing cost of goods sold by
average inventory.
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IPO(See initial public offering.)
just-in-time inventoryAn inventory strategy in which components arrive at the company immediately before they are needed rather than
being stockpiled.
leverage ratiosRatios that measure the degree to which a firm is financed through debt rather than equity, including the debt-to-asset ratio and
the debt-to-equity ratio.
liabilitiesThe total debts owed by the firm, including current liabilities and long-term liabilities.
liquidity ratiosRatios that measure a firm's ability to pay its bills, including the current ratio and quick (acid test) ratio.
loss leadersProducts that are purposely priced below cost in order to attract customers into the store.
management philosophyThe basic philosophy management uses in operating the business and that forms a key part of the firm's mission statement.
market developmentA growth strategy in which the firm attempts to expand the market to which it sells its products or services.
market nicheThe specific portion of an industry in which a firm competes as well as a portion of the industry market ignored by competitors.
market shareThe percentage of total industry sales held by a single firm.
mission statementA firm's overall and broad guiding statement of purpose that includes the basic description of the firm, its nature, and
its philosophy.
O
operational resourcesThose resources that are directly related to producing a firm's products or services.
planning horizonThe length of time into the future that a firm should consider; varies by type of firm and industry.
price elasticityThe sensitivity of a product's volume to changes in price that must be considered in making pricing decisions.
primary informationInformation that a manager collects specifically for the analysis being done; may include surveys, product testing, or
discussions with managers.
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proactive managementManagement that carefully considers a firm's current and future environment and makes plans to take advantage of
developing changes rather than reacting to changes only when they occur.
product developmentA growth strategy in which a firm develops new variations or improvements of existing products.
product life cycleThe variation in the sales of a product as it moves from introduction to growth to stability to decline.
product lineThe entire offering of a firm's products with broadly similar characteristics. Many small manufacturing businesses offer only a
single product line but may have a number of similar products in the line.
product mixThe total offering of a firm's products that may consist of a number of product lines.
profitability ratiosRatios that measure a firm's degree of profitability in comparison with sales, assets, or investment, including return on sales,
return on assets, and return on investment.
quick ratio(See acid test ratio.)
radical changeMajor changes or new inventions that completely revamp an industry.
reactive managementManagement that does not plan ahead but instead reacts only to immediate changes in its environment.
relevant business opportunitiesOpportunities that a business has the capabilities to exploit; not all environmental opportunities are relevant
business opportunities.
resistance to changeThe tendency of people in a business to maintain the status quo and keep things the way they are.
return on . . . A profitability ratio in which a firm's net income is divided by one of three variables: assets, income, or investment.
secondary informationInformation that is gathered from already published sources; may include census data, company records, or information
from the Internet.
selling strategyThe particular strategy used to sell a product to a customer that will vary depending on the type of product and the industry.
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statement of workAn agreement between a consultant and a client detailing what tasks will be done by the consultant on behalf of the client;
outlines the nature and scope of the project.
stockoutA term describing what happens when a firm is able to sell more of its product(s) than it can produce or buy.
strategic fitThe degree to which a firm's strategy meshes with its basic mission and management philosophy, particularly important when the firm
is considering acquiring another firm or introducing a new product.
strategic planThe document that a company's managers write as a result of the strategic planning process to guide the operation of the firm over
the foreseeable future.
strategic planning processThe actions taken to develop a strategic plan and including the premise phase, the analysis phase, and the action phase;
the process is perhaps more important than the plan itself.
strategic reaction timeThe length of time between an environmental change and a firm's change in strategies to take advantage of it.
sustainable competencyA distinctive competency that can be continued over time and that usually requires either patents, unique designs, or
specific skills unable to be duplicated by competitors.
target action plansVery specific short-run actions to achieve unit or company goals.
target marketThe group of customers most likely to buy the firm's products and the group on which the firm should focus most of its
marketing resources.
total asset turnoverAn activity ratio that measures the extent to which assets are used in the production of goods; measured by dividing sales by
total assets.
trade areaThe geographical area in which most of a firm's customers reside: may be a few blocks for a grocery store, an entire city for a
specialty store, or an entire country or the world for a major manufacturer.
unit goalsThe goals of the individual units within the firm that may consist of marketing goals, human resource goals, operations goals, or
financial goals; and they may be horizon, near-term, or target goals.
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unit strategiesThe strategies developed by units within the firm to achieve unit goals and contribute to the overall company strategies and goals.
venture capitalistsOrganizations that specialize in providing financing for high-risk, high-return business ventures and that typically insist
on significant ownership of the business in exchange for providing equity capital.
vision statementA statement of some future desirable situation for the business; the overall guiding direction for the firm.
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Index
Access, ease of, 114
Accounts receivable turnover ratio, 107-8
Acid test ratio, 107
Acres, Sue and Jim, 149
Action
plans, target, 170-75, 212
action tasks, 173
barriers to, 171-73
deadlines, 174
feedback, 174
integrative goal model, 174-75
responsive, 8-9
tasks, 173
Activity ratios, 107-8
Adaptability, 136
Advertising, 117, 183, 208
Advisory board, 11
Aging population, 62
Almanac of Business and Industrial Financial Ratios, 98
Amazon.com, 131, 132, 134
Analysis phase, 14, 15
distinctive competencies and, 139
Analytical ability, 4
Angels, 109
Annual Statement Studies, 98
Antiques Limited, 186
Apple Computer, 182
Asset turnover ratio, 107
Assisted-living facilities, 62
Atcom/Info, 112
Balance sheet, 99
Bar coding system, 121
Bard Optical, 50
Barriers, 171-73
Benefits (compensation strategies), 192
Ben & Jerry's Homemade Ice Cream, Inc., 138-39
Blazing Graphics, 50
Blue Ribbon Car Wash, 149
Board of directors, 11
Boston Beer Company, 44
Brainstorming, 85-87, 126
Business and its environment, 205
Business objectives, employee knowledge of, 11
Business plan, 12, 213
Callaway, 80
Cannondale, 37, 183
Capacity, 120
Capital, sources of, 109, 211
Cascade Properties, 50
Cash flow statement, 102-4, 212
Celestial Seasonings, 50
Change
anticipation of, 5
growth and, focus on. See Growth and change
incremental vs. radical, 70
resistance to, 40-41
strategic planning and, 8, 42
Clif Bar, 6
Columbia Sportswear, 139, 140
Commitments, 26-27
Communication, 30
change and, 42
of goals, 163, 175-76
through mission statement, 45

of strategic plan, 212-13
page_233
Page 234
Company goals, 166-67
in strategic plan, 206
Comparative financial summaries, 98-100
Comparative percentage summaries, 100-2
Compensation system, 125-26, 191-92, 211
Competence, 26
Competition/competitive
analysis of, 3, 4-5
awareness and focus, 10-11
environment. See Industry environment,
analysis of pricing, 118
response, 37
rivalry, 72, 75-76, 78-79
weaknesses, 141-42, 143-44
Competitive drivers, 65, 66, 82
Computer technology, 58
Confidentiality, 26
Consultants/consulting
communicating the plan, 19, 214
competitive weaknesses, assessing, 143-44
distinctive competence and, 142-43
facilitating planning process, 18
general environment, analysis of, 65-66
driving forces, 65-66
external focus, 65
goal setting and, 175-76
growth and change
direction for, 49, 50-51
strategies, 159-60
industry environment, analysis of, 84-88
external information, sources of, 84
primary external information, collecting, 87
primary internal data, collecting, 84-87
secondary internal and external information, collecting, 88
internal analysis and, 126-28
externally driven perspective, 127-28
future-oriented framework, 127
nature of, 23-25
phases of process, 25-33

building rapport, 26-27
data gathering and analysis, 29-30
making recommendations, 30-33
problem definition, 27-29
plans versus planning, 18-19
types of consultants, 24-25
types of projects, 25
unit strategies, 198
written strategic plan, 213-14
Consumer orientation, 136
product/service development and, 5
tastes and preferences of, 3, 76-77
Controlled growth, 159-60. See also Growth and change; Growth strategies
Copper's Cabinetry, 154
Courtland Clubs, 133-34
Creativity and innovation, 37-40
customer contact, 37-38
diversity of opinion, encouraging, 40
mistakes, learning from, 39
procedures and routines, challenging existing, 38
risk taking, 38-39
training and development, 38
Crisis management, 10, 37, 55
Crystal Rug Cleaners, 150-51, 156
Current ratio, 106
Customer(s)
characteristics of, 76-77, 79-80
contact, 37-38
demands of, 37
financing and, 197
information from, 87
surveys, 123
vision statement and, 44
Cybercafes, 134, 135
Data, gathering and analyzing, 29-30
answers, practical, 30
communication, 30
listening, 29-30
preparation, 29
Davis, Jim, 73-74
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Page 235
Deadlines, 26-27, 174
Debt strategies, 194-95
Debt-to-equity ratio, 108
Dell, Michael, 2, 43
Dell Computers, 185
Demand drivers, 65-66, 82
Demand issues, 61-63
Demographics, 61-63, 112, 114
demand issues, 61-63
labor issues, 63
Dependency, 80
Deregulation, 59
Development, 38
Devil's advocate, 40
Direction
goals and, 162
in mission statement, 45
setting, 10
Disney, Walt, 2
Distinctive competencies, 129-44, 205-6
consultant's viewpoint, 142-43
environmental opportunities vs. relevant business opportunities, 130-31
identifying and developing areas of, 131-37
relating to relevant business opportunities, 137-38
role of, 131
strategic alliances and, 152-53
strategic planning and, 139-41
sustaining, 138-39
Distribution, 119
strategy, 185-87, 208
Diversification strategies, 155-56, 158
Diversity, 40
Driving forces, 65-66
Dun and Bradstreet, 98
Economic
changes, 63-64
trends, 37
Edward Jones financial services, 148
Edwards, Curt, 75-76
Edwards Service Station, 75-76
Efficiency, 37
Eisenhower, Dwight D., 11
Emerging business, 5-6
environmental influences and, 54.
See also General environment, analysis of
entry barriers, 80
growth and change, direction for, 35-52
creative and innovative environment, building, 37-40
forces for change, 36-37
management for, 41-42
mission statement, 44-49
vision statement, 43-44
planning barriers, 8
planning model, 14
EMI, Ltd., 143
Employees, 123-26
compensation of, 125-26, 191-92, 211
deadlines and, 173-74
as distinctive competence, 136-37
goals and, 162-63, 176
image of company and, 118
knowledge of business objectives and, 11
labor issues, 63
mission statement and, 45
morale of, 124-25
number of, 124
promotion of, 211
selection of, 191
vision statement and, 44
Environment, 4-5
analysis of, 14
general environment. See General environment, analysis of
industry environment. See Industry environment, analysis of
reaction time and, 13
Environmental brainstorming, 85-87
Environmental opportunities, 130-31
Environmental Threats and Opportunities Profile, 81-82, 86
Equipment, 197, 210
Equity strategies, 195-97
Erickson, Gary, 5-6
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Facilities, 187-88
Fast food industry, 60
Feedback, 174
Filo, David, 40
Financial projections, 212
Financial ratios, 104-10
activity ratios, 107-8
leverage ratios, 108-9
liquidity ratios, 104, 106-7
profitability ratios, 109
Financial resources, 4, 5
Financial resource analysis, 97-110
cash flow statement, 102-4
comparative financial summaries, 98-100
comparative percentage summaries, 100-2
financial ratios, 104-10. See also Financial ratios
information sources, 98
Financial strategy, 192-97
debt strategies, 194-95
equity strategies, 195-97
need for a plan, 197
Financing, 12, 211-12
Finished inventory strategy, 190
Fitness industry, 72
Five Fingers Inc., 142
Flexibility, 7, 136
Focus groups, 87
Focus strategies, 147-48, 157
Forecasting, 8
Foreign markets, 64
Franchising, 151-52
Fringe benefits, 125
Galvin, Paul, 43
Gaston Ridge Home Health Care, Inc.
strategic plan, 217-23
business and environment, 218-20
distinctive competencies, 220
mission statement, 218
strategy and goals, 220-21
target goals and action plan, 223

unit-level strategies, 221-23
vision statement, 217
Gates, Bill, 2
Gateway Computers, 183, 185
General Electric, 43, 143
General environment, analysis of, 53-66
driving forces, 65-66
external focus, 65
demographic changes, 61-63
demand issues, 61-63
labor issues, 63
economic changes, 63-64
global changes, 64
nature of, 55-57
political and legal changes, 59-60
proactive management, 55
social changes, 60-61
technological changes, 58-59
value of, 54-55
Geographical expansion, 148
Global changes, 64
Goals, 12-14, 161-76, 206
benefits of specific, 162
characteristics of good, 16, 162-63, 176
consultant's perspective, 175-76
creation of, 164-65
conflict among, 164-65
priorities, 165
goal statements, 206
levels of, 166-67
in mission statement, 46
segmentation process, 169
in strategic plan, written, 206
target action plans, 170-75
action tasks, 173
barriers to, 171-73
deadlines, 174
feedback, 174
integrative goal model, 174-75
time frames, 167-69
unit, 166-67, 207-12
financial projections, 212

financing, 211-12
human resources, 210-11
marketing, 207-8
operations, 208-10
GoCard Postcard Advertising, 142
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Government policy changes, 59
Growth and change, 35-52, 211-12
see also Growth strategies
creative and innovative environment, building, 37-40
forces for change, 36-37
industry, 70-72, 73-74, 97-98
managing for, 41-42
mission statement, 44-49
uncontrolled growth, business failure and, 47
vision statement, 43-44
Growth profit margin, 109
Growth strategies, 16, 145-60
appropriate strategy, selection of, 157-58
high-growth industry and, 157-58
low-growth industry and, 158
diversification strategies, 155-56
related diversification, 155-56
unrelated diversification, 156
focus strategies, 147-48
market development strategies, 148-53
franchising, 151-52
internal development, 150-51
strategic alliances, 152-53
product development strategies, 154-55
topology of, 146
in written strategic plan, 206
Harley's Hardware, 78-79
Hedlund, Dennis, 112, 113
Historical data
goal setting and, 164
planning and, 7-8

Historical trends, importance of, 83
Horizon goals, 167-68, 206
Houlihan, Bill and Sandy, 186
Human resources, 210-11
barriers to target goals and, 171
evaluating, 123-26
strategy, 190-92
employee selection, 191
wage and salary strategies, 191-92
IBM, 139
Image, 114, 118-19, 136
pricing and, 182
Income statement, 99, 100, 212
Incremental product development, 154
Industry data, 8
Industry drivers, 54
Industry environment,
analysis of, 69-89
competitive rivalry, 72, 75-76, 78-79
external information, sources of, 84
primary external information, collecting, 87
primary internal data, collecting, 84-87
secondary internal and external information, collecting, 88
customers, characteristics of, 76-77, 79-80
industry growth rate, 70-72, 73-74
nature of industry, 70
performing an environmental analysis, 81-33
deciding what to consider, 82
Environmental Threats and Opportunities Profile, 81-82
historical trends, 83
suppliers, 80-81
Industry Norms and Key Business Ratios, 98
Informational sources, 59-60, 98
Initial public offering, 195-96
Innovation. See Creativity and innovation
Integrative Goal Model, 174-75
Intel, 70
Internal analysis, 14, 91-128
externally driven perspective, 127-28
future-oriented framework, 127

page_237
Page 238
elements of, 92, 95-97
internal analysis profile, 96
internal strengths and weaknesses, 95, 97
financial resource analysis, 97-110
cash flow statement, 102-4
comparative financial summaries, 98-100
comparative percentage summaries, 100-2
financial ratios, 104-10. See also Financial ratios
human resources, evaluating, 123-26
marketing resources, evaluating, 110-19
distribution, 119
image, 118-19
location, 112, 114-16
market knowledge, 112, 113-14
market performance, 111
price, 118
product, 116
promotion, 117
operational resources, 120-23
inventory control, 121-22
production facilities, 120
quality control, 123
structure, 122
suppliers, access to, 120-21
profile, 96
strategic conclusions, 110
value of, 92, 94
Internal audits, 123
Internal development, 150-51
Internal problems, 8
Internet
information available on, 59-60
privacy issues, 66
promotion on, 184
Inventory
control, 121-22
finished inventory strategy, 190
holding period, 108
turnover ratio, 107
IPO, 195-96
J
Jewel Food Stores, 56
Jones, Patricia, 48
Joy's Toy Company, 48, 49, 209
Just-in-time inventory system, 122
Kahaner, Larry, 48
Kali's Sport-Naturals Inc., 6
Kali's Sweets and Savories, 5-6
KangaKab, 62
Kennedy, John F., 43
Keynes, John Maynard, 12
Koogle, Timothy, 40
Kultur International Films, Ltd., 112, 113-14
Kurzweil, Ray, 147
Kurzweil Education Systems, 147-48
Labor issues, 63
Leasing equipment, 197, 210
Legal changes, 59-60
Leverage ratios, 108-9, 110
Liquidity ratios, 104, 106-7
Listening, consultants and, 29-30
Loans, 193-94. See also Financial strategy
Location, 112, 114-16, 135, 187-88
Long-term goals, 12
Lowe's, 48
Macroenvironment. See General environment, analysis of
Make-or-buy decisions, 188-89, 209
Mallett, Jeffrey, 40
Management
crisis management, 10, 37, 55
environmental opportunities, identifying, 130-31
goal conflict and, 164-65
for growth and change, 41-42
-labor relations, 124-25
operational structure and, 122
proactive, 55
page_238
Page 239
Manufacturing businesses
distribution and, 185-87
location and, 115
make-or-buy decisions, 188-89, 209
selling strategy of, 185
Market, 3
see also Demographics; Market development strategies
customer target, 76-77
defining, 181-82
knowledge of, 112, 113-14
performance, 111
targeted in mission statement, 46
Market development strategies, 148-53, 157, 158
franchising, 151-52
internal development, 150-51
strategic alliances, 152-53
Marketing
resources, evaluating, 110-19
distribution, 119
image, 118-19
location, 112, 114-16
market knowledge, 112, 113-14
market performance, 111
price, 118
product, 116
promotion, 117
strategy, 181-87
distribution, 185-87
pricing, 182-83
product mix, 182
promotion, 183-84
selling strategy, 184-85
target market segment, 181-82
unit goals and, 207-8
Market research, 3
Marriott, J., 2, 43
Max Racks, 142
Medium-term goals, 12
Microsoft, 70
Mission statement, 44-49, 203-5
guidelines for, 48-49
readiness and, 51
sample, 217-18
Mistakes, learning from, 39
ModaCAD, Inc., 153
Model, strategic planning, 14-17, 139
Moose Creek, 140
Morale, of employees, 124-25
Motivation, 125
MRM, 92, 93
Near-term goals, 167-68, 206
achieving. See Unit strategies
Nelson, Jon, 193
New Balance Athletic Shoe, Inc., 73-74
New business, 4
see also Emerging business
environmental influences and, 54.
See also General environment, analysis of
planning barriers to, 7-8
planning model, 14
Niche, filling a special, 136
Nicholas, Ted, 30
North American Free Trade Agreement (NAFTA), 64
Objectives. See Goals
Obsolescence, 70
Operational resources, 120-23
inventory control, 121-22
production facilities, 120
quality control, 123
structure, 122
suppliers, access to, 120-21
Operations, unit goals and, 208-10
Operations strategy, 187-90
facilities, 187-88
vendor selection, 189-90
Operation Quick Strike, 74
Opinions, encouraging diversity of, 40
Opportunity cost, 187
Oral presentation, 32-33
Organic Online, 192, 193

Organizational skills, 4
Organizational structure, 122
Osborne, Adam, 94
Osborne Computer Corporation, 94
Overcapacity, 188
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Page 240
Parking, 114
Parkinson, Andrew and Thomas, 55, 56
Partnerships, 195
Peapod, Inc., 56
Pennsylvania House, 183
Performance, goals and, 162
Personal selling, 117, 184
Planning horizon, 12-14
Plans
business, 12
consultant facilitation of, 25
special-purpose, 11
strategic. See Strategic planning
Political changes, 59-60
Premise phase, 14, 15
Preparation, consultants and, 29
Presentations, 25
Price, 118, 137
Pricing strategy, 182-83, 207
Primodial, 138
Prioritization, 165
Problem definition, consultants and, 27-29
awareness, 27-28
statement of work, 28-29
Procedures, challenging existing, 38
Product(s), 182
depth of line, 116
development stategies, 154-55, 157, 158
distribution, 119
image, 116
improved, 37
life cycle, 71-72
obsolescence, 70
operation strategy and, 209-10

quality and, 123
service of, 116
strategy, 207
uniqueness of, 79-80
Production facilities, 120
Profitability ratios, 109
Promotion (employee), 211
Promotion (product), 117, 183-84, 207-8
Publicity, 117
Purchasing drivers, 87
Quality, 37, 134
control, 123
pricing and, 182-83
Quick ratio, 107
Radical product development, 154
Raw materials, 80-81, 120
Reactive business, 55
Reder Electronics, 203
Related diversification, 155-56
Reputation, 136
Retail businesses
location and, 112, 114, 115
product mix and, 182
promotion, 184
sales force, analysis of, 117
suppliers and, 121
Return on total assets ratio, 109
Richards, Michael, 151, 156
Rigato, Tony, 93
Risk taking, 38-39
Robert Morris Associates, 98
Ross Marketing Services, Inc., 9
Routines, challenging existing, 38
Rules and regulations, 37
changes in, 59
Safeway, Inc., 56
Salaries, 125, 191-92
Sales promotion, 117

Security, 213
Self-analysis, 4
Selling strategy, 184-85
Senior citizens, 62-63
Senturia, Neil, 112
Service, 135
Services
demand for, 3
development, 5
distribution and, 186-87
improved, 37
quality of, 123
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Page 241
Shenson, Howard, 30
Short-term goals, 12
Short-term inventory financing, 197
Size of business, planning and, 2
Small Business Administration, 194
Small businesses
failure of, 4
planning barriers to, 6-7
Social changes, 60-61
Special-purpose plans, creation and development of, 11
Specialized Bicycles, 183
Statement of work, 28-29
Stead, Jere, 38
Stern, Bill, 3-4
Stock brokerage industry, 66
Strategic alliances, 152-53, 157
Strategic plan(ning)
barriers to, 6-11
emerging businesses and, 8
new businesses and, 7-8
small businesses and, 6-7
benefits of, 8-11
defining, 12
format, 16-17
historical data and, 7-8
model, 14-17, 139
need for, 3-6
process, 11-14
sample plan, 217-23

writing of. See Written (strategic) plan
Strategy development phase, 15, 16
Strengths and weaknesses, 9-10
company image and, 118
competitive weaknesses, assessing, 143-44
internal, 95, 97. See also Internal analysis
planning model and, 14, 15
Structure, of an organization, 122
Suppliers, 80-81, 87, 189-90, 210
access to, 120-21
financing and, 197
retailers and, 121
Target goals, 168-69, 212
Target markets, 112, 181-82
Tax laws, 59
Technical consulting, 25
Technology, 37
changes in, 58-59, 126
Terry, Georgena, 36
Terry Precision Bicycles for Women, 36
Thomas, Lisa, 5-6
Time, lack of, 8
Trade shows, 184
Traffic patterns, 114
Training and development, 38, 126
Trek, 37, 183
Trends, 64
economic, 37
historical, 83
Troy, Leo, 98
Undercapacity, 188
Unit goals, 166-67, 207-12
see also Growth strategies
financial projections, 212
financing, 211-12
human resources, 210-11
marketing, 207-8
operations, 208-10
Unit strategies, 16, 179-98
financial strategy, 192-97

debt strategies, 194-95
equity strategies, 195-97
need for a plan, 197
human resources strategy, 190-92
employee selection, 191
wage and salary strategies, 191-92
marketing strategy, 181-87
distribution, 185-87
pricing, 182-83
product mix, 182
promotion, 183-84
target market segment, 181-82
operations strategy, 187-90
facilities, 187-88
vendor selection, 189-90
page_241

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Fred L. Fry, Charles Stoner, Laurence Weinzimmer - Strategic Planning For New & Emerging Businesses - A Consulting Approach (1999, Kaplan Business)

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title : Strategic Planning for New & Emerging Businesses : A Consulting Approach

author : Fry, Fred L.; Stoner, Charles R.; Weinzimmer, Laurence G.

Strategic Planning for New & Emerging Businesses

Editorial Director: Cynthia Zigmund

© 1999 by Dearborn Financial Publishing, Inc.®

Published by Upstart Publishing

Printed in the United States of America

Library of Congress Cataloging-in-Publication Data

List of Figures vii

Appendix: Sample Strategic Plan 217

Figure 6.3 100

Figure 6.4 101

Figure 6.5 102

Figure 6.6 103

Figure 6.7 105

Figure 6.8 115

Figure 6.9 115

Figure 7.1 136

Figure 8.1 146

Figure 9.1 166

Figure 9.2 167

Figure 9.3 168

Figure 9.4 170

Figure 9.5 171

Figure 9.6 172

Figure 9.7 175

Figure 10.1 180

Figure 11.1 204

Profile 6.3 113

Profile 7.1 132

Profile 7.2 133

Profile 7.3 135

Profile 8.1 149

Profile 8.2 151

Profile 8.3 153

Profile 10.1 186

Profile 10.2 193

Profile 10.3 196

Profile 11.1 203

Profile 11.2 209

• be aware of the need for planning;

• be able to differentiate emerging businesses from other small businesses;

• be able to identify barriers to planning;

• realize the benefits of planning, especially for emerging businesses; and

• understand how the strategic planning model works.

The Need for Planning

The New Business

The Emerging Business

Barriers to Planning in Small Businesses

Barriers to Planning in New Businesses

Barriers to Planning in Emerging Businesses

The Benefits of Strategic Planning

The Strategic Planning Process

Defining Strategic Planning

Determining the Planning Horizon

The Strategic Planning Model

III. The business and its environment

V. Growth-strategies and goals